82 Chapter 3 Hospitality Operating Structures purchased the franchise from Burger King over 15 years before Schoenwandt was injured in the restaurant. QUESTION FOR THE COURT The question for the court was whether Jamfro and Burger King were involved in a parent-subsidiary relationship or a franchise agreement. If Burger King was found to be the parent company and Jamfro the subsidiary, then Schoenwandt could sue both Jamfro and Burger King. If Burger King was found to be only the franchisor, it would be dismissed from the lawsuit and not be liable for Schoenwandt’s injuries. Schoenwandt argued that Burger King exercised complete control over the daily operations of Jamfro and that it was this control that resulted in his injuries. Burger King argued that the agreement between it and Jamfro was merely a franchise agreement, with control being surrendered to Jamfro upon creation of the franchise. Pointing to the franchise agreement, Schoenwandt then argued Burger King retained control through certain terms in the agreement. Specifically, Schoenwandt argued Burger King retained control by reserving the right to terminate the agreement or reenter the premises if Jamfro failed to conduct business properly. DECISION The court ruled in favor of Burger King, holding the relationship between Jamfro and Burger King was that of franchisor-franchisee. Burger King was not liable for Schoenwandt’s injuries and was dismissed as a party to the lawsuit. MESSAGE TO MANAGEMENT Franchisors need to be cautious when considering the extent of control over the franchised operations in the franchise agreement. WHAT DID YOU LEARN IN THIS CHAPTER? Establishing the appropriate business format for a hospitality operation is a decision that requires owners or managers to consider the amount of liability risk they are willing to absorb, the willingness to pay taxes on the operation’s profits, and the degree of control they wish to exercise over the business. There are a variety of organizational structures, to choose from, each offering different benefits to the business operator. Your business may not fit within the parameters established for particular structures so your choices may be limited. However you choose to operate your business, you will rely on others to represent the interests of your business. To varying degrees, you will be responsible for their decisions and acts. Determining the types of employees that will be needed for your business operation, and the degree of control they will have, is an important liability consideration that must be factored into your choice of an organizational structure. Franchises are used widely in the hospitality industry and are popular investment vehicles for many entrepreneurs. In a franchise operation, the business owner agrees to adhere to certain financial and operating conditions imposed by the franchisor in exchange for the right to provide a brand-name product or service. There are legal pros and cons for both the franchisor and the franchisee that arise from these business relationships. RAPID REVIEW After you have studied this chapter, you should be prepared to: 1. Identify those organizational structures that result in paying income taxes based on distributed, as compared to earned, profits. Explain the advantages of each approach. 2. Explain the phrase respondeat superior, in terms of liability and organizational structure. Describe a real situation in which the phrase takes on meaning. 3. Compose a letter to a potential lender addressing only the issue of why the or-
The Hospitality Franchise 83 ganizational structure you have selected for your new business group makes it advantageous for the lender to grant you the loan you have requested. 4. State the defining characteristics of six types of organizational structures used in the hospitality industry as they relate to: Taxes Liability Financing Transfer of ownership 5. List six areas of disclosure addressed by the FTC Franchise Rule. Select one of these areas and explain why you think it is important. 6. Using the Internet, locate the case of a recent lawsuit pitting a franchisor against his or her franchise company. Discuss the merits of the lawsuit. (Hint: Try www.findlaw.com.) 7. Contrast five advantages and five disadvantages of operating a restaurant or hotel as a franchisee, compared to operating as an independent. 8. Assume you own a restaurant that is successful in part because of a signature menu item with a secret recipe. Prepare a noncompete agreement for a chef you are hiring that you feel would be fair to both of you. TEAM ACTIVITY 1. Pair up in teams of two, then pair up with another team. One team will represent the franchisor and one team will represent the franchisee. 2. After reviewing the five crucial franchise issues—enroachment impact, purchasing requirements, operations manual changes, renewal clauses, and noncompete clauses—negotiate these five areas of contention to a compromise, if possible, and provide a brief description of the compromise. If a compromise is not possible, describe the remaining disputed issues.
Chapter 4 Legally Managing Property 4.1 INTRODUCTION TO PROPERTY Real Property Fixtures Personal Property 4.2 PURCHASING PROPERTY Purchasing Real Property Purchasing Personal Property 4.3 FINANCING THE PURCHASE OF PROPERTY Debtor and Creditor Relationship Mortgages and Deeds of Trust Security Agreements Financing Statements 4.4 LEASING PROPERTY Essential Lease Terms as a Lessor Essential Lease Terms as a Lessee Rights of the Landlord The Buy-versus-Lease Decision 4.5 RESPECTING INTELLECTUAL PROPERTY RIGHTS Trademark Patent Copyright Trade Dress Preventing Intellectual Property Rights Infringement
86 Chapter 4 Legally Managing Property The staff meeting had been going well. Trisha Sangus, general manager of the hotel, sat at the head of the conference table. The heads of sales and marketing, food and beverage, security, engineering, front office, and housekeeping were all in attendance, as was the property controller. Trisha enjoyed the weekly meeting. It gave her a chance to learn from each of her colleagues, as well as to help her to guide their development. She knew that several of them had an interest in someday serving as a general manager, and she realized that an important part of her job was helping to give them the skills and knowledge they would need in their future careers. Some of them were almost ready for the next level of management, while others still had to master some of the basics they would have to face as a general manager. Trisha was about to launch into a discussion of a proposed change she wanted to make in the type of background music playing in the lobby area when Walter Lott, the chief maintenance engineer, spoke up: “Ms. Sangus, I almost forgot—the garage called this morning on the van.” This won’t be good, thought Trisha. The hotel’s 17- passenger van was only three years old, but had already accumulated over 250,000 miles, due to a constant series of trips transporting guests to and from the airport. Maintenance costs had been averaging $500 a month. Fortunately, the van’s engine had been holding up well, given its high number of miles. The van drivers had noticed a defective headlight in yesterday’s daily inspection, and while the van was in the shop, the chief engineer had asked the service technician to investigate a periodic slippage in the transmission that prevented the van from accelerating properly. Walter Lott continued, “It’s the transmission alright, and the drive shaft. I think we can get it back in service for about $2,500, but I wanted to check with you first.” “Let’s buy a new van,” said Mr. Dani, the front office supervisor. “The old one is really starting to show its age.” “It’s not in the capital budget,” said Ms. Waldo, the controller, with a sigh. “Well,” said Mr. Ray, director of security, “if it stops running completely, you’ll just have to use the ‘Somewhere Account’!” As the laughter died down, Mr. Dani asked, “What’s the Somewhere Account?” Trisha replied wryly, “It’s the account we use when we have to find the money somewhere, because we have no choice. It’s a figure of speech.” “How about a lease?” asked the executive housekeeper. “That’s too expensive,” said the food and beverage director. “It’s like renting an apartment instead of buying a house. Always buy, that’s what my father told me.” “I thought leasing was less expensive,” the executive housekeeper replied. “That’s what my car dealer told me.” “Don’t we save on taxes by leasing?” asked Mr. Dani. “I wouldn’t lease,” said the food and beverage director, “unless the auto dealer pays for the repairs; otherwise, it’s too expensive.” “But I thought we didn’t have the funds anyway,” said the sales and marketing director. “Ms. Waldo said we don’t have the capital funds in the budget,” Trisha replied. “There are other funds. But before we do decide to lease or buy a new van—if that’s in fact what we should do—we need to talk about the differences between leasing and buying.” Trisha knew her one-hour meeting was about to become a two-hour gathering, but she also knew, from the comments around the table, that her staff needed to understand some basics about property, leasing, and buying. “Listen,” she began. “There is a world of difference between buying and leasing a van, or anything else the hotel needs. I’ll tell you why. . . . ” 1. The difference between real property and personal property. 2. The function of the Uniform Commercial Code when buying property. 3. How to evaluate the purchase-versus-lease decision from a legal perspective. 4. How to avoid infringement of patent, copyright, and concept rights. IN THIS CHAPTER, YOU WILL LEARN: 4.1 INTRODUCTION TO PROPERTY In the hospitality industry, when a hotel manager is away from the hotel, it is common to say that he or she is “off property.” Property, in this sense, refers to the grounds and building of the hotel. At the same time, when a guest enters the pool area, he or she may see a sign that states, “Towels are provided for your convenience, but are the property of the hotel.” In this case, property refers to
Introduction to Property 87 a physical asset owned by the hotel. With so many different meanings and uses of the word, property, and its legal characteristics, is an extremely important concept for a hospitality manager to understand. In the hospitality industry, there are two types of property the future manager must learn to administer. They are: Real property Personal property Within the category of personal property, the two subtypes are tangible and intangible property, as shown in Figure 4.1. A tangible item is one that can be held or touched. Thus, furniture is a tangible form of property, as are land, equipment, food inventories, and a variety of other materials needed to effectively operate a hospitality facility. Intangible items are those that cannot be held or touched, but have real value, although that value can sometimes be difficult to establish, such as the good will of a business. Understanding the way the law views property is important, because it affects how property ownership disputes and claims are settled, the rights of an individual to use the property as they see fit, and even how ownership of the property is allowed to transfer. The law treats real property differently from personal property, and these distinctions are critical for managers to understand. Real Property Real property refers to land and all things that are permanently attached to land. Real estate is a related term that is frequently used when referring to real property. Certainly, the trees on a country club’s land are part of its real estate. So, too, are the ponds, streams, and grassy areas that make up the golf course. Improvements are features such as fences, sewer lines, and the like, which are changes or additions to land that make it more valuable. Fixtures While at first observation it may appear simple to determine what is real property and personal property, at times it is quite complex. This difficulty comes from trying to distinguish between items that were intended as improvements that are “permanently attached” to the land, as opposed to simply being placed on the land. Clearly, a chimney built into the golf course clubhouse would be considered permanently attached to the clubhouse building. But would a fan placed on the floor of the dining room be considered permanent? Would a fan affixed to the chimney to improve heat circulation be considered real property? Would it matter exactly how the fan was attached? The answer to these more complex questions comes with an understanding of the legal terms chattel and fixture. A fan set on the floor of a dining room would not be considered real property. Because it is clearly movable, it would be classified as chattel. In contrast, a fan that has been permanently installed in the fireplace itself would be considered a fixture. Fixtures include all the things that are permanently attached to property, such as ceiling lights, awnings, window shades, doors, and doorknobs. It is important to note that it is possible to remove an item that has been permanently attached to real property. Thus, a ceiling fan that has been permanently installed in a dining room could, of course, be removed. However, from a legal standpoint, an item that is to remain with the property would ordinarily be identified as a fixture. Figure 4.1 Property types. LEGALESE Real property: Land and all the things that are permanently attached to it. LEGALESE Personal property: Tangible and intangible items that are not real property. LEGALESE Real estate: Land, including soil and water, buildings, trees, crops, improvements, and the rights to the air above, and the minerals below, the land. LEGALESE Improvements: An addition to real estate that ordinarily enhances its value. LEGALESE Chattel: Personal property, movable or immovable, that is not considered real property. LEGALESE Fixture(s): An article that was once a chattel but that has become a part of the real property because the article is permanently attached to the soil or to something attached to the soil.
88 Chapter 4 Legally Managing Property Questions often arise as to whether certain fixtures and/or improvements are to be considered real property or treated as personal property. The general rule is: If an item can be removed without damaging any real property, the item is generally considered to be personal property. When the issue is not clear, it is best to consult with an attorney skilled in this area of the law. Personal Property Anything that is not real property is personal property, and personal property is anything that isn’t nailed down, dug into, or built into the land. A restaurant on an acre of ground is real property, but the tables and chairs in the dining room are not. A restaurant building permanently attached to a plot of land is real property. A van used for catering that is parked in the restaurant’s parking lot is not. As previously stated, personal property can be considered either tangible or intangible. Tangible property is the type that we most often think of when referring to goods owned by a company or individual. Tangible property can be thought of as all of those items that can easily be moved from one location to another. Automobiles, furniture, artwork, and food inventories are all examples of personal property. Intangible property can be just as valuable as any real estate or tangible personal property. Intangible property includes items such as franchise rights, trademarks, money, stocks, bonds, and interests in securities. A share of Hilton Corporation stock is a tangible piece of paper, but its real value emanates from the fact that it represents an intangible shareholder interest in the Hilton Corporation. Money is also a form of intangible property. A five-dollar bill is a tangible piece of paper, but it represents an intangible interest in the monetary system used in the United States. To appreciate the importance of intangible property, consider the case of Stanley Richards. Stanley invents a seasoning salt for beef, which chefs around the world agree is spectacular. His wife Ruth creates a small, stylized cartoon drawing of a cow for the label of his seasoning. Stanley consults an attorney, who helps the Richards apply for and receive the exclusive right to use Ruth’s drawing in their business. Stanley’s product is a huge success. Soon, the stylized cow is associated worldwide with creativity, good taste, and uncompromising quality. Millions of people immediately recognize the cow drawing and what it represents. Stanley is approached by a multinational seasoning company that produces seasonings for poultry, pork, and fish. They would like to use Ruth’s drawing on ANALYZE THE SITUATION 4.1 Jay Geier purchased a cinnamon roll franchise from a franchisor. To house the operation, he purchased a small, but ideally located, building from David Stein. The two individuals agreed upon a fair price, then both Mr. Geier and Mr. Stein signed the sales contract. Mr. Geier was to take possession of the property on March 1. On the morning of February 28, Mr. Geier arrived at the property to take some exterior measurements he would need in order to get a contractor’s bid on resurfacing the parking lot. He observed Mr. Stein removing a window air conditioning unit from the small manager’s office at the rear of the building. Mr. Geier protested that the air conditioner should not be removed, as it was part of the sale. Mr. Stein replied that the air conditioner was his personal property and was never intended to be sold with the building, nor was it specifically mentioned in the sales contract. 1. Can Mr. Stein be permitted to take the air conditioner? 2. Would the air conditioner be considered real or personal property? 3. Should the air conditioner have been mentioned in the sales contract? LEGALESE Tangible property: Personal property that has physical substance and can be held or touched. Examples include furniture, equipment, and inventories of goods. LEGALESE Intangible property: Personal property that cannot be held or touched. Examples include patent rights, copyrights, and concept rights.
Purchasing Property 89 their own products. The company feels that having the drawing prominently displayed on its own products would improve market awareness of their nonbeef seasonings. The right to use the stylized drawing of the cow, so valuable in this case, is an example of an intangible property right. While the drawing of the cow itself may be easily duplicated and worth only a few cents, what the stylized cow drawing represents is extremely valuable and may not simply be taken from the Richards without their agreement; they, and they alone, have the right to determine how this property can be legally used. It is important to note that a partnership or company, as well as an individual, can own personal property. Thus, the word “personal” designates that the property is not “real” property. Instead, personal property could be considered all property that is not “real” or real estate. 4.2 PURCHASING PROPERTY For the hospitality manager, the buying, leasing, or selling of property occupies a great deal of time. The foodservice director at an extended-care facility will buy property from vendors, such as food, supplies, and equipment, then turn around and sell some of that property—in this case, the food—to the residents of the facility. At the same time, other equipment for the operation may be leased, such as a dishwasher or a soda-dispensing machine. On a much larger scale, the director of operations for a large hamburger chain may be responsible for buying or leasing land on which to put new stores, buying or leasing the equipment that will go into the new stores, as well as selling off real and personal property that the company no longer needs. Purchasing Real Property In order to sell property legally, the seller must have a legal title to that property. It is the responsibility of the buyer to verify this right, however; otherwise, the buyer may find after the purchase that he or she does not legally own the property at all! Whether the hospitality manager is purchasing real or personal property, the establishment of title to the property being purchased is the responsibility of the manager. And while it might appear that title to lands and real estate would be very simple to verify, the process in fact can be quite complex. Deeds Title to real property can be transferred from an owner in a variety of ways, such as marriage, divorce, death, an act of the courts, bankruptcy, giftgiving, or a sale. A deed is the formal document used to transfer ownership of real property from one person or entity to another. A deed will consist of the date, the names and descriptions of the parties involved in the transfer, the consideration, a full description of the property, and any exceptions to the transfer. Deeds may be either warranty deeds or quitclaim deeds. The laws governing deeds vary from state to state; thus it is important to make sure that legal title to the real property is provided in the deed. When there is any doubt as to the legitimacy of the title to a property, it is sometimes necessary to conduct a title search. Title Insurance Even when the ownership of a piece of property is well established through a title search, it is advisable for a buyer to purchase title insurance. Title insurance is a critical part of any commercial or private purchase of real estate. This insurance helps protect the interests of the buyer should another individual claim ownership of a piece of property after the buyer has completed the sale. Title insurance will cover any losses as the result of these claims. LEGALESE Deed: A written document for the transfer of land or other real property from one person to another. LEGALESE Warranty deed: A deed that provides that the person granting the deed agrees to defend the title from claims of others. In general, the seller is representing that he or she fully owns the property and will stand behind this promise. LEGALESE Quitclaim deed: A deed that conveys only such rights as the grantor has. This type of deed transfers the owner’s interest to a buyer, but does not guarantee that there are no other claims against the property or that the property is indeed legally owned by the seller. LEGALESE Title search: A review of land records to determine the ownership and description of a piece of real property. LEGALESE Title: The sum total of all legally recognized rights to the possession and ownership of property.
90 Chapter 4 Legally Managing Property Some common instances where title insurance has protected a buyer include: Forgery Improper court proceedings Survey mistakes Missing heirs Unfiled liens Some inexperienced managers confuse title insurance with loan policy insurance. Loan policy insurance protects a lender (such as a bank) from claims against title to the real property, while title insurance protects the buyer. To illustrate the importance of title insurance, consider the case of William Clark. Mr. Clark has a daughter named Kimberly. When her father dies, Kimberly inherits a piece of land outside a major city. Mr. Clark did not leave a will, but the house he lived in, and the land it rested on, was passed on to Kimberly, his only living heir, by state law. Thirty years later, Kimberly Clark sells the land to Brian Lee, who builds a restaurant on the site. Five years later, Joshua Davidson produces a lien and a will that, he claims, was signed by Mr. Clark. The will clearly states that Mr. Clark wished to leave the land not to his daughter, but to Mr. Davidson, to settle an old debt. In this case, Mr. Lee’s claim to the land may be questionable. Title insurance would protect Mr. Lee if the newly produced will were in fact proved to be valid. Purchasing Personal Property For the future hospitality manager, purchases of personal property will, in most cases, vastly exceed purchases of real estate. Because this is true, it is very important to have a thorough understanding of the law and practices surrounding the transfer of ownership of personal property. Bill of Sale A bill of sale is the formal document used to transfer ownership of personal property from one individual or entity to another. As shown in Figure 4.2, the following items are included in a bill of sale: LEGALESE Bill of sale: A document under which personal property is transferred from a seller to a buyer. Figure 4.2 A bill of sale.
Purchasing Property 91 Name of seller Name of buyer Consideration Description of the property Statement of ownership by seller Date of sale Because a bill of sale is a contract, it can take many forms. In the hospitality industry, it is common for a buyer to agree to buy a certain type of good from a vendor on a regular basis. Consider the case of Renee Miller, the director of housing and foodservices at a state-supported university. Renee knows she will need a large amount of ground beef throughout the school year, but because she has limited freezer space, she must take delivery of the beef on a monthly basis. To negotiate the best possible price, she places all of her ground beef business with the same meat wholesaler. Renee executes a special contract for sale of goods with the seller to ensure that the quality, price, and terms she has agreed upon are maintained throughout the year (see Figure 4.3). Figure 4.3 Contract for sale of goods.
92 Chapter 4 Legally Managing Property A contract developed to transfer ownership of personal property is common when the property cannot be viewed at the time of sale, as in Renee Miller’s case, or when the property has not yet been manufactured. For example, if a hotel orders custom-made drapes and bedspreads, they may not be manufactured by the seller until a contract for their sale has been signed by both parties. As is the case with all contracts, the contract for sale of goods should be carefully examined by both the buyer and seller. It is important to determine exactly when the transfer of ownership occurs in a sale of personal property. Generally, goods are shipped FOB, which means, “free on board.” When used, the term refers to the fact that shippers are responsible for the care and safety of goods until they are delivered to the buyer’s designated location. Transfer of ownership occurs not at the time of sale in this case, but upon delivery. Notice that in both the bill of sale and the more formal contract for the sale of goods, the seller is not required to provide a title when transferring ownership. This is different from the sale of real property, where a title (deed) is a required part of the transaction. Unlike real property, ownership of personal property is generally assumed by its possession, and it is not customary for the seller to prove his or her ownership rights by a title. An exception to this rule is the sale of motor vehicles. Stolen Property In the case of stolen property, even though possession implies ownership, it does not equate to the lawful right to sell. There is no criminal penalty imposed by law if a buyer innocently purchases stolen goods from a seller who purports to own those goods. However, in the event the rightful owner takes steps to reclaim his or her goods, the innocent buyer would have no recourse except to go back to the thief; that is, the buyer could file a lawsuit against the thief for the return of any money paid. In reality, the ability of the buyer to identify and help prosecute the thief is often minimal. Obviously, it is in the hospitality manager’s best interest to buy only from reputable sellers. A restaurant or hotel manager may be punished if it can be shown that he or she knowingly purchased stolen goods. While it may be easy to trace stolen goods, it is more difficult to determine if a buyer, in fact, knew the goods were stolen. However, frequently it can be inferred from circumstances surrounding the purchase. ANALYZE THE SITUATION 4.2 As the owner operator of a popular Italian restaurant, controlling costs is an important part of your day-to-day activities. Costs of labor, food, and equipment are your direct responsibility. Profit margins are good, but controlling costs is a constant challenge. At a meeting of the local chapter of the state restaurant association, you see your friend Wayne, who excitedly tells you about a purchase he has just made. Wayne owns and operates an upscale steakhouse in your town. He purchased 50 full-sized stainless-steel line pans for $2 each from a passing “liquidator.” Wayne tells you that he jumped at the chance to buy them because when new, the line pans cost $75 each. When you inquire about the seller, Wayne says that two men simply arrived at his restaurant in a small pick-up truck, with a variety of equipment and small wares in the uncovered back. “Best of all,” Wayne says with a wink, “as soon as I washed them and put them in with my regular stock, there was no way anyone could tell the difference between the ones I just purchased from the ones I already had!” Talk at the restaurant association meeting centers on rising food costs and the likelihood of having to raise menu prices. Several operators state that they are seriously looking at price increases. You, too, have been considering such a move. Wayne tells the group that at his place, “We are going to hold the line on price increases this year.” 1. If you had needed them, would you have purchased the pans? 2. What are the legal issues at play here? What ethical issues are at play? 3. If the “sellers” in this scenario are caught and confess to selling stolen merchandise, do you think that Wayne will get to keep his pans?
Purchasing Property 93 A buyer is violating federal law if he or she knowingly purchases stolen goods, and those goods have: (1) a value of over $5,000 and (2) been a part of interstate commerce. The term interstate commerce merely refers to the movement of property from one state into another state. In order to commit a federal offense, a person must know that the property had been stolen, but he or she need not know that it was moving through interstate commerce. Because of the severe penalties involved, the prudent hospitality manager will avoid purchasing any property that: is sold at far below its real value, is sold at odd times or by questionable salespersons, or if there is doubt as to its origin. If something appears too good to be true, it generally is, and thus should be avoided. Warranty Those who sell property often find that any promises they make about that property can help to better sell it. For example, if the human resources manager at the corporate office of a franchise company decides to purchase a copy machine, the promises, or warranties, made by the copy machine’s manufacturer may play a significant role in the machine selected. If two copy machines cost approximately the same amount, but the manufacturer of one warrants that it will provide free repairs if the machine breaks down in the first two years, while the other manufacturer does not, the warranty of the first manufacturer would probably be a deciding factor in the selection of the copy machine. Before signing any contract for the purchase of goods, it is a good idea to determine what warranties, if any, are included in the purchase. When purchasing real property, a deed helps explain exactly what is included with the purchase. In a similar manner, a warranty helps explain exactly what rights are included in a purchase of personal property. It is important to remember that a warranty is part of the sales contract. That is, the intangible rights a warranty offers the buyer are just as real as the property itself. Because they are part of the contract, it is always important to make sure that any warranties offered verbally are documented in the sales contract. Warranties can be considered to be either expressed or implied. An express warranty is created when a manufacturer makes a statement of fact about the capabilities and qualities of a product or service. These statements can be made either by a salesperson or in promotional literature. Examples include statements such as: “This copier will make 35 copies per minute,” or “This dishwasher uses six gallons of water for each rinse cycle.” When a seller makes claims about the capabilities of a product or service being offered, that seller is obligated under the law to deliver a product that meets all of the capabilities described. Because express warranties are considered to be part of the sales contract, the law enforcing the truthfulness of warranties is the Uniform Commercial Code, which you read about in Chapter 2, “Hospitality Contracts.” When a buyer relies on factual representations to purchase a product or service, and those statements later prove to be false, then a breach of the sales contract has occurred. Under Article 2 of the UCC, the buyer may be entitled to recover damages from the seller. The UCC further protects the interests of buyers by requiring that any products sold be fit for use and free of defects. Thus, even though a seller may not specifically claim that his or her products are free of defects, a buyer would expect that any product purchased would be in good working order. This type of unwritten expectation is called an implied warranty. Under Article 2 of the UCC, personal property that is sold must conform to two implied warranties. One implied warranty is that the item is fit to be used for a particular purpose. This is known as an implied warranty of fitness. The second implied warranty is that the item will be in good working order and will adequately meet the purposes for which it was purchased. This is called an implied warranty of merchantability. LEGALESE Warranty: A promise about a product made by either a manufacturer or a seller that is a part of the sales contract.
94 Chapter 4 Legally Managing Property In many states, consumers can enforce their rights with respect to implied warranties for up to four years after a purchase. This means that, for the first four years of a product’s life, the seller is liable for any defects or breakdowns of his or her product, including the implied warranties established by the UCC. The seller has the right to disclaim, or negate, any express or implied warranties by inserting language into the sales contract. The UCC has drafted standard contract clauses that can be used for those situations. As with any sales contract, the disclaimer must be in writing and must be agreed to by both parties. Just as price is a negotiable part of any contract, so too are warranties. It is a good idea to try to negotiate additional warranties before making a purchase. BeFigure 4.4 Manufacturer’s warranty.
Financing the Purchase of Property 95 fore buying personal property, it is imperative to understand the warranty offer and to compare warranties from competing brands before making a purchase. Effective hospitality managers seek to negotiate the longest, strongest, most comprehensive warranty possible, and insist that the warranty be in writing. When evaluating the final warranty offer, the following questions should be considered: 1. How long is the warranty? 2. When does the warranty begin? 3. Will it include the charges for the parts and/or labor to make the repairs? 4. What parts of the purchase are covered by the warranty? 5. Can you lose the warranty if you do not follow manufactures guidelines for routine service and maintenance, and who can perform these tasks? 6. Where is authorized service performed? 7. Who pays to deliver the defective product to the repair area? Figure 4.4 is an example of a warranty a hotel manager might encounter when buying dishwashers for a new extended-stay facility. Notice the promises that are made by the dishwasher’s manufacturer. 4.3 FINANCING THE PURCHASE OF PROPERTY The buying and selling of property is fairly straightforward when the buyer pays the seller the entire purchase price all at once. It is more complicated, however, when the buyer decides to pay for property over time. Consider the case of Bill Humphrey. Mr. Humphrey operates a 400-room hotel in the downtown area of an extremely large city. Mr. Humphrey determines that the ice machines in his hotel must be replaced. The cost will be in excess of $100,000. His controller advises him that the hotel cannot afford to purchase the ice machines for cash at this time, but could afford to make monthly payments toward the purchase price. Mr. Humphrey approaches the hotel’s bank, explains the problem, and secures a loan to purchase the ice machines. In this scenario, a number of problems could arise. What if the hotel cannot make its loan payments? What rights would the bank then have? Could it retake possession of the ice machines? These and other complications can arise any time personal property is financed. Debtor and Creditor Relationship A lien is the right of a person to retain a lawful interest in the property of another until the owner fulfills a legal duty. If, for example, a restaurateur purchases new tables and chairs from a seller, but elects to pay one-half of the purchase price at the time the tables are delivered and the other half over a period of six months, the seller would retain a lien on the tables and chairs. That is, the seller would maintain a lawful ownership interest in the chairs until they were paid for in full. Of course, since the tables and chairs are housed in the restaurant, the restaurateur would also have partial ownership and rights to the property. In this scenario, two parties have legitimate and legal claims to the ownership of the tables and chairs. This complex relationship of dual ownership can be made easier to grasp with a better understanding of collateral and liens. Collateral and Liens Collateral is an asset a person agrees to give up if he or she does not repay a loan. A lien is a claim against the property (the collateral) used to ensure payment of a debt. Liens can be recognized by contract, from general trade practices, or implied by law. The process of legally recording a contractual lien is known as “making the lien perfect,” or “perfecting” the lien. The possessor of a lien, who files the ap- LEGALESE Lien: A claim against property that gives the creditor (lienholder) the right to repossess and/or sell that property if the debtor does not repay his or her debt in a timely manner. LEGALESE Collateral: Property that is pledged to secure the repayment of a debt. LEGALESE Perfect a lien: To make a public record of a lien, or to take possession of the collateral.
96 Chapter 4 Legally Managing Property propriate records with the proper public office, is known as a secured creditor. This type of creditor has a superior right to possession of the collateral or any proceeds if the collateral is sold. Perfecting a lien implied by law is done by taking possession of the property. If, for example, an in-room air conditioning unit is taken to a repair facility, the repaired unit will normally stay in the possession of the service facility until payment for the repairs has been made. Other liens include judgment liens, which are those ordered by the courts, and landlord liens, whereby a landlord can secure payment of rent by taking a tenant’s property if necessary. In most states, mechanics or persons who furnish materials for buildings are entitled to a lien. In some states, these claims must be filed in the office of the clerk of the court, or established by a suit brought within a limited time. Upon the subsequent sale of the building, these liens if properly filed are paid. Mortgages and Deeds of Trust When financing the sale of real property, the creditor will generally insist on securing the debt with a lien backed by collateral. In most cases, the lien will be filed on the real property being purchased. For example, if Marion Pennycuff wishes to purchase land and a building in which to house a café, he could secure funding for this purpose from a bank, providing his financial position is good. Marion would actually buy the real property with money loaned by the bank, and the bank would file for a mortgage lien on the property. In this instance, the land and building would serve as collateral for the loan. In some states, a deed of trust serves as a substitute for a mortgage lien, but serves an identical purpose. If Marion should decide to sell the property before he has completely repaid his mortgage, a buyer would not be able to obtain a clear title to the property, until the original mortgage was completely repaid. Assume, however, that Marion wished to borrow the $100,000 to begin a consulting company, instead of purchasing the land and building. It is most likely that the bank would still require Marion to provide collateral to secure the loan. This collateral could be in the form of real or personal property that Marion owned, including intangible personal property such as stocks or bonds. Security Agreements When creditors retain some legal rights of ownership in a piece of personal property, they are said to have a security interest in that property. When personal, rather than real, property is involved, creditors protect and establish their interest by means of a security agreement. The security agreement is an arrangement similar to the mortgage or deed of trust. In it, the creditor makes a loan, and the debtor agrees to pay back the loan in a timely fashion. If the debtor doesn’t, then the creditor has the right to seize the personal property, sell it, and apply the money generated by the sale to the debt. The debtor is still responsible for any remaining balance. Article 9 of the Uniform Commercial Code is the law that regulates purchases made using security agreements, and that gives a creditor the right to take back property that the debtor either cannot or will not pay for. As with other areas, the UCC requires debtors and lenders to follow specific procedures in order to finance the purchase of property in a way that is legally binding and that will be upheld by the courts. For example, because it is a contract, the security agreement must include a written description of the property that is being purchased, and must be signed by both parties. LEGALESE Mortgage: The pledging of real property by a debtor to a creditor to secure payment of a debt. LEGALESE Deed of trust: Used in some states instead of a mortgage. A deed of trust places legal title to a real property in the hands of a trustee until the debtor has completed paying for the property. LEGALESE Security interest: A legal ownership right to property. LEGALESE Security agreement: A contract between a lender and borrower that states the lender can repossess the personal property a person has offered as collateral if the loan is not paid as agreed.
Leasing Property 97 Financing Statements Under UCC rules, in order for a security agreement to fully protect the creditor, it must be perfected. This is generally done by preparing and filing a financing statement. A financing statement is the tool used in most states to record (perfect), a lien on personal property. These statements are typically filed with either the secretary of state’s office and/or the local county recorder of records. To perfect their lien, creditors file a financing statement, or UCC-1 form, with the appropriate official. The filing of the UCC-1 form publicly states that a lien exists on a particular piece of personal property. Unless otherwise indicated, the financing statement remains in effect for five years. When the loan has been paid off, the debtor can request a termination statement that clears the financing statement from the public records. Figure 4.5 is a copy of the UCC-1 form currently in use. Note that it lists the debtor, the creditor, (secured party), and a description of the property that serves as the collateral. If a creditor has been asked to use a piece of personal property as collateral for a loan, he or she can review the financing statements on file at the office of the governmental agency retaining these records. If creditors find that no previous liens have been recorded against the property, they can be assured that they will have perfected their interest in the property when they properly file a UCC-1 on that property. It is common in the hospitality industry to buy personal property with a loan from a third-party creditor, such as a bank, or to have the purchase price financed over time by the seller. If for example you, as a manager, wish to purchase $30,000 worth of cash registers for a new restaurant, you have three options: Pay seller purchase price in full: No UCC-1 required. Borrow purchase price from a third-party lender (such as a bank), and pay seller in full: Third-party lender (bank) files UCC-1 on the cash registers, evidencing its lien on the registers. Seller agrees to finance purchase price over time: Seller files UCC-1 on the cash registers, evidencing its lien on the registers. 4.4 LEASING PROPERTY Just as it is common to buy personal property in the hospitality industry, it is equally common to lease it. Both real and personal property can be leased. Because a lease is a type of contract, it must clearly indicate the item to be leased, the price or rent to be paid, and the consent of the two parties to the lease—the lessor and lessee. A lease is different from a purchase of property in that leases transfer possession, rather than ownership. It is critical that hospitality managers understand fully the essential terms of any leases they enter into, and the differences inherent in leasing, rather than owning, a piece of property. Essential Lease Terms as a Lessor Hospitality managers take on the role of a landlord when they designate specific space in their hotel or restaurant to be operated by a tenant. Historically, hotels would lease lobby space to those businesses of interest to their guests. Thus, tailors, dressmakers, jewelers, furriers, and the like would occupy hotel space and provide additional revenue for the property. Parking lot operators might lease the hotel’s parking spaces. More recently, in an effort to satisfy guest demands for regional or nationally well-known restaurants, some hotels have begun leasing their entire foodservice LEGALESE Financing statement: A formal notice of a lien being held on personal property, required under the Uniform Commercial Code in most cases. Also called a UCC-1 because of its form number in the UCC. LEGALESE Lease: A contract that establishes the rights and obligations of each party with respect to property owned by one entity but occupied or used by another. LEGALESE Lessor: The entity that owns the property covered in a lease. LEGALESE Lessee: The entity that occupies or uses the property covered in a lease. LEGALESE Landlord: The lessor in a real property lease. LEGALESE Tenant: The lessee in a real property lease.
98 Chapter 4 Legally Managing Property Figure 4.5 Financing statement excerpt from Uniform Commercial Code.
Leasing Property 99 operations. In addition, airports and shopping malls have become landlords for well-known, or “branded,” foodservice concepts that appeal to a variety of guests. When hospitality managers take on the role of landlord, it is critical that the lease contracts they enter into be reviewed by legal counsel prior to signing. An attorney can help ensure that the duties of both landlord and tenant are clearly spelled out in the lease, and that in the event of a breach of the agreement, appropriate remedies are available to the landlord. Consider the case of Michael Singh. Mr. Singh serves as the general manager of a 400-room hotel. Mr. Singh elects to lease his gift shop to an elderly couple with excellent references, and they operate the gift shop successfully for several years. Through no fault of their own, illness causes the couple to become less prompt in opening the gift shop. In fact, on a few days within the past two months, the shop has not opened at all. Mr. Singh knows that the couple’s continued inability to open the store could severely damage the hotel’s business. The rights of the hotel and the tenant in a situation like this must be clearly documented, so that the hotel manager can take appropriate steps to remedy the problem. The hospitality lease, especially for real property, is generally different from that of an ordinary landlord and tenant relationship. When a landlord leases a home or apartment, the day-to-day use of that property is normally not subject to the inspection of the landlord. For the hotel operator, however, a lease is drawn up with the expectation that the space will be used for an activity that enhances the financial well-being of the hotel under terms contained in the lease. Thus operating hours, products sold, and even pricing strategies may be contained in a hospitality manager’s lease when he or she serves as landlord. While a residential landlord may not impose him- or herself unduly on a tenant, the hospitality manager has a responsibility to make sure the tenant operates in compliance with the lease, since the tenant’s actions can be helpful or harmful to the success of the entire hotel. The following areas of a lease agreement deserve special attention when a hospitality manager assumes the role of the lessor (or landlord). Length of Lease The lease length is important in that it directly affects rent amounts. Landlords prefer leases that are long because they minimize vacancies and guarantee a steady source of revenue for the use of the space. Increasingly, tenants also prefer long leases to avoid the rent increases that often occur when leases are resigned. However, a lease that is too long may prevent a landlord from raising the rent when necessary. In a like manner, the tenant may find that his or her business grows beyond the ability of the leased space to contain it, and a move to a larger space is required. In all cases, the lease length should be established to meet both the short-term and long-term interests of both parties. Lease start dates, or occupation dates, should be clearly established in the lease agreement. Often, lessees will want early access to the space in order to install fixtures and make improvements. The number of days required to complete this work can be significant, and the party responsible for rent during that time period, or whether rent is to be paid at all, should be clearly spelled out. While it is less common that hospitality managers find themselves as lessors of personal property, sometimes it does occur. An example would be the resort hotel that rents bicycles to its guests. This rental arrangement provides an excellent service to guests, but creates special liability issues for the hotel. These issues will be discussed in Chapter 10, “Your Responsibilities as a Hospitality Operator to Guests.” Rent Amount Lease payments on real property are typically of four distinct types, based on the payment responsibilities of the lessee. A “net” lease is one in which the lessee pays some or even all of the taxes due on real property, in addition to the base rent amount.
100 Chapter 4 Legally Managing Property In a “net net” lease, the lessee pays for both taxes and insurance as required by the lessor. In a “net net net,” or triple-net lease—the most common type in the hospitality industry—the lessee pays for all of the costs associated with occupying the property, including building repairs and maintenance. In a “percentage” lease, tenants pay a fixed percentage of their gross revenue as part of their lease payment. While some fixed charges may also apply, the unique feature of this lease is its variability. Thus, a hotelier might charge the gift shop lessee monthly rent based on the sales achieved by the gift shop. In this way, rent payments are lower when business is slow for the shop, but increase as the business and the lessee succeeds. It is important that both landlord and tenant understand the costs for which they will be responsible. When leasing personal property, the hourly, daily, monthly, or quarterly payments required should be clearly identified in the lease agreement. Subleasing Rights of Tenant Most lessees realize that conditions can change, and they may not be able to or want to fulfill all of the lease terms specified in the lease agreement. Consider for example, the shopkeeper who leases space for a flower shop in an urban hotel. The shopkeeper is very successful, and elects to sell her rights to the flower shop space to open a larger shop in a different part of the city. In this situation, the shopkeeper will want to sublet—that is, to transfer or assign to another—her interest in the hotel lease to a new shopkeeper. The concern of the hotel, as the lessor, of course, is that the new shopkeeper must be able to meet the requirements set forth in the lease. For this reason, it is a good idea for the lessor (hotel manager) to insist that any sublessee demonstrate his or her financial strength and integrity before the lessor approves the sublease arrangement. While it would not be reasonable for the lessor to have complete say over who the sublessee may be, it is also not reasonable for the choice of sublessee to be left solely in the hands of the original tenant. Accordingly, leases should address this issue with a clause acknowledging the right of the lessee to sublease, but only with the landlord’s written consent. The clause should also state that the landlord’s consent cannot be unreasonably withheld. Insurance Landlords are favorite targets for litigation. If a tenant is negligent, and the result is injury to an individual, the lessor must be protected. The size and types of policies that the lessor should require may vary, but in all cases the lessor should insist that: The lessee’s insurance carriers must be acceptable to the lessor. Copies of the insurance policies should be delivered to the lessor at the time of the lease signing. Lessees and their insurance companies should be required to give prior notice to the lessor if the policies are canceled, withdrawn, or not renewed. In addition, landlords, when preparing leases, may insert exculpatory type clauses that seek to limit their liability. As seen previously, these clauses may not provide complete protection, but they can sometimes be helpful. It is best to have a commercial insurance agent or attorney who is experienced in insurance to review lease provisions and insurance policies to ensure that both lessor and lessee have adequate insurance coverage for the responsibilities allocated to each by the lease agreement. Termination Rights Leases may be terminated for a variety of reasons, but these reasons must be clearly spelled out as part of the lease. If, for example, a tenant is LEGALESE Sublet: To rent property one possesses by a lease, to another. Also called subleasing.
Leasing Property 101 delinquent in paying rent, the lessor can require that the premises be vacated. Most landlords will allow the payment to be made a few days later without penalty. This grace period should be clearly identified in the lease, as well as any penalties that will be assessed if the payment is tendered beyond the grace period. Disturbances, violation of operating hours, significant damage to the property, and failure to abide by lease terms may all be justification for termination. However, while the reasons may be valid, they will not justify an eviction unless those reasons are distinctly identified in the lease. When you as a hospitality manager serve as a landlord, the quality of the tenants who supply services to your guests can reflect well or poorly on the overall operation. Capable tenants who operate their businesses in a professional manner can be a real asset to a hospitality property; inexperienced or less-qualified tenants can cause great difficulty. When serving as a lessor, it is imperative that the hospitality manager examine the essential lease terms discussed in this section to ensure the best possible chance of the lessee’s, and the lessor’s, success. Essential Lease Terms as a Lessee When a hospitality manager takes on the tenant role in a lease arrangement, the lease may be for either real or personal property. When Mike Keefer decided to open a steakhouse, he discovered that his own favorite steakhouse was, in fact, for sale. Rather than sell Mike the restaurant, the owner agreed to lease the land, building, and equipment to him in exchange for a percentage of the restaurant’s gross sales. This arrangement provided Mike with a lower-cost entry into the restaurant business, and provided the landlord with continued ownership of the restaurant property. Whether the hospitality manager leases land, buildings, or equipment, such as dishwashers, icemakers, and beverage machines, it is important that an attorney review the provisions of the lease prior to signing. The following items deserve the hospitality manager’s special attention when leasing real or personal property. 1. Landlord representation and default. When a tenant leases real property, or an individual leases personal property, it is generally assumed that the lessor has the legal right to lease the property for its intended purpose. The issue of landlord representation and truthfulness, however, can become complex. Consider the case of the restaurateur who examined a property for use as a restaurant. The landlord stated in the lease that the space could lawfully be operated as a “restaurant.” After the lease was executed, the restaurateur found that the restaurant’s proximity to a school prevented him from obtaining a liquor license. The community zoning laws prohibited selling alcohol near a school. Thus, the landlord’s representation that the space could be used as a restaurant was true, but only if that restaurant elected not to serve alcohol. The lesson here is that, as a tenant, any representation made by the landlord about the fitness of property for its intended purpose should be independently verified. A related concern for lessees is the rights they have if the landlord should lose possession of the property through default. If, for example, a tenant pays his or her rent on time, but the landlord defaults on loans in which the property served as collateral, the rights of the lessee should be addressed in the lease. A clause can be inserted in the lease that guarantees that the tenant’s lease will be undisturbed. This is an area of the lease that is best carefully reviewed by legal counsel. 2. Expenses paid by landlord. Whether the lease negotiated is a net, a net net, a triple net, a percentage lease, or some combination thereof, disputes over covered expenses are a common LEGALESE Eviction: The procedure that a lessor uses to remove a lessee from physical possession of leased real property, usually for violation of a significant lease provision, such as nonpayment of rent.
102 Chapter 4 Legally Managing Property source of landlord/tenant disagreement. Because the landlord has limited ability to reduce expenses during periods of financial difficulty, there are few options available to him or her when costs must be reduced. If electricity is to be paid by the landlord, it represents a significant expense and should be addressed directly by the hospitality operator. A restaurant consumes a large amount of electricity through cooking equipment, dishwashing, and air conditioning. The lease should clearly identify whether any limits are set on the quantity of electricity that can be used, as well as the types and capacities available. HVAC is the acronym for heating, ventilation, and air conditioning. In both a net and a net net lease, the repair and maintenance of these items are part of the lease arrangement and are ordinarily paid for by the landlord. The services provided for HVAC maintenance and repair can be critical and should be included in the lease, along with a schedule of times when the services are available. ANALYZE THE SITUATION 4.3 Sandy Aznovario leased a corner space in a shopping center to operate Olde Style Buffet, an all-you-can-eat buffet geared toward senior citizens and families. The buffet was especially popular on weekends, and its best business was done on Sundays, before and after people in the community normally attended church. Kathy Miley was the landlord for the shopping center. She and Sandy signed a net net lease, clearly stating that maintenance and repair of the HVAC system would be the responsibility of the shopping center’s commercial real estate company. On Easter Sunday, the Buffet’s busiest day of the year, the head cook reported to Sandy that the overhead exhaust system in the kitchen was not working, and the kitchen was becoming unbearably hot, smoky, and humid. Sandy called the landlord’s leasing office and heard a recorded message stating the office was closed because of the Easter holiday. Sandy then contacted Beatty’s 24-hour Emergency HVAC Repair Service, which sent a representative, who examined the HVAC system, then replaced a broken fan belt on the rooftop exhaust fan. Sandy submitted the bill from Beatty’s, including a triple-time labor charge for holiday service, to Kathy Miley’s company for payment. Kathy refused to pay the bill, stating that Beatty’s was not the authorized HVAC service company used by Miley, nor did the lease specifically state that HVAC service would be provided on holidays. 1. Who is responsible for this bill? 2. What could have been done beforehand to keep this conflict from occurring? Like HVAC service and repair, cleaning services, if provided as part of the lease payment, should be clearly identified, and a schedule of cleaning times should be attached to the lease itself. The number of times the restroom is cleaned daily, as well as a definition of “cleaning” should be provided. Does it include floor mopping and the cleaning of toilets and mirrors each time? Or does the cleaning only involve removing large paper debris from the floors? Obviously, a guest will have a different experience under these two alternatives. It is the responsibility of the hospitality manager who leases space to determine precisely what he or she will get in the way of services included, and expenses paid for, by the landlord. 3. Terms of renewal. The terms under which a tenant may renew his or her lease should be of utmost importance to the hospitality manager who finds himself or herself in the role of lessee. Consider the situation of David Berger. David is the district real estate manager for a chain of muffin shops. As part of his job, David negotiates
Leasing Property 103 leases for the company’s 800-square-foot operations. More than property leases are managed by David. One of David’s prime concerns when negotiating a lease is the provision for renewal. If David selects a successful site, he will seek to renew his lease with as little upward change in rent as possible. If the site is less successful, he may elect not to renew the lease, or do so only with a significant reduction in lease payments. It is important to note that a landlord has no obligation to continue a lease that has expired. Because of that, David often encounters landlords who wish to dramatically increase the rent payments for spaces where the muffin shops have shown great success. To prevent this, David insists that renewal formulas limiting rent increases to an acceptable amount be written into each lease when it is originally signed. Normally, a lease can be extended only upon written notice from the lessee. Leases can, however, be written in such a way so as to renew automatically, unless terminated in writing by one of the parties to the lease. Rights of the Landlord Most tenants understand that a landlord will have the right to periodically inspect their property. This should, however, be allowed only at reasonable hours, and with reasonable notice. Of even more importance to most tenants is the right of a landlord to lease to a competing business. Consider the case of a landlord with a large 30-store shopping center. It is in the best interest of the landlord to fill all the space with highquality tenants. The space may even be large enough to house more than one hospitality operation, for example, a bagel shop and a pizzeria. If, however, the landlord rents space in the shopping center to an upscale bakery, would it be fair for that same landlord to rent space in the same shopping center to a second upscale bakery? Unless the lease of the first bakery expressly prohibits it, the landlord would have the right to lease space to a direct competitor. While few landlords will give a tenant veto power over any new tenants, it is reasonable to expect that a landlord will allow a tightly drawn definition of any future competitor, in order to help ensure the success of a tenant considering the leasing of space. Deposits, Damages, and Normal Wear and Tear Normally, a landlord will require a deposit payment for the lease of real property. Landlords who lease personal property may also require deposits to ensure the return of the leased item in good condition. The amount of the deposit should be clearly spelled out in the lease. Certainly, tenants must be held responsible for damages they incur on leased property. Tenants should not, however, be responsible for the normal wear and tear associated with the use of a piece of property. Difficulties can arise when the definition of normal wear and tear varies between landlord and tenant. Because it can be a source of conflict, the more detail that can be added to this section of the lease, the less likely it is for litigation to result. Dates by which a landlord must return a deposit upon lease termination, and the appropriate method of resolving disputes about owed amounts, should also be included. Unfortunately, legal clashes between landlord and tenant are common occurrences. They can be reduced when if both parties to the lease carefully consider the essential lease terms that most directly affect the success of the lessor and lessee relationship. When vacancies are high, landlords may be willing to negotiate on terms they otherwise would reject. Likewise, if space is in short supply, tenants may be in a weaker negotiating position. Carefully reviewing lease terms is always a good idea and one that the hospitality manager would be well advised to undertake only with the aid of a qualified attorney.
104 Chapter 4 Legally Managing Property The Buy-versus-Lease Decision The decision to purchase or lease a piece of property is an important one. Managerial philosophy can play a large part in this decision. Regardless of whether one elects to own or merely utilize property, the decision has wide-ranging effects on a number of business issues. The most important effects are addressed in the next Legally Managing at Work discussion. LEGALLY MANAGING AT WORK: Legal Considerations of Buying versus Leasing 1. Right to use Purchase Lease Unlimited use in any legal manner Use is strictly limited to the terms seen fit by the owner. of the lease. 2. Treatment of cost Purchase Lease Property is depreciable in accordance Lease payments are deductible as with federal and state income tax laws. a business expense, according to federal and state tax laws. 3. Ability to finance Purchase Lease The property may be used as The property may not generally be collateral. used for collateral. 4. Liability Purchase Lease Owner is liable. Lessee and/or lessor may be liable. 5. Improvements Purchase Lease Implemented as desired by owner. Improvements limited to those allowed by lease terms. 6. Termination Purchase Lease Ownership passes to estate holders. Right to possess concludes with termination of lease contract. 7. Default Purchase Lease Lender retains down payment Lessor retains deposit and/or and/or may foreclose on the property. lender may evict and pursue balance of lease. With personal property, the lessor may reclaim the leased item. Often, the decision to lease rather than purchase property is an economic one. A new passenger van for a hotel may cost over $30,000. If the van is purchased, the hotel has undertaken a capital improvement. Payments for the van are not deductible as a business expense on the monthly profit and loss (P&L) statement. The value of the van, however, may be depreciated over a period of time fixed by law. LEGALESE Capital improvement: The purchase or upgrade of real or personal property that results in an increased depreciable asset base. LEGALESE Depreciation: The decrease in value of a piece of property due to age and/or wear and tear.
Respecting Intellectual Property Rights 105 If a hotel operator wants to replace the air filters located in the ceiling of an atrium-style lobby four times a year, it makes little sense to purchase the mechanical lifts necessary to do the job. These pieces of equipment can be leased for a day and the task can be completed. On the other hand, if a restaurateur wants to operate a restaurant in a prime location in a mall food court, he or she may have no option other than leasing, because the mall owner is not likely to sell the restaurateur the space needed to operate, but rather will lease the space under a commercial lease. The owner of a piece of property has rights that a lessee does not enjoy. In some cases, however, the effective hospitality manager, for a variety of reasons, may find it desirable to lease a piece of property. In either case, it is important to know and protect the rights associated with each type of property’s possession. 4.5 RESPECTING INTELLECTUAL PROPERTY RIGHTS Some of the most important and personal property rights protected by law are those that relate to intellectual property, personal property that is both intangible and conceptual. In the hospitality industry, some managers violate intellectual property rights by using, but not paying for, the intellectual property of others. Good managers both avoid infringing on the property rights of others and pay for those intellectual items they legitimately use to assist their business. When an individual creates something that is unique and valuable, his or her right to enjoy the financial proceeds of that creation is protected by laws related to trademarks, patents, copyrights, or trade dress. It is important to note that intellectual property maintains its status even after the death of the person who created the property. Trademark Trademarks are used to identify the producer, manufacturer, or source of a product. They are frequently used in the hospitality industry. The reason is clear: Guests like to see name-brand products in use by the establishments they frequent. Well-established trademarks, or marks as they are sometimes called, let consumers know precisely whose product they are buying or being served. For example, many restaurants find it convenient to serve ketchup directly from the bottle. As a consumer, a bottle manufactured and labeled by Heinz will elicit a much different response from one manufactured by Bob. When consumers see the Heinz name on the label, they associate the ketchup with the quality represented by the Heinz company. An unscrupulous foodservice manager who buys Bob’s ketchup, then puts it in a Heinz bottle, violates not only food safety laws, discussed later in this text, but trademark property rights laws as well. The owner of a trademark has the right to prevent others from using that mark, if the owner was the first to use it in the respective marketplace. When a trademark has been properly applied for and received, no other person may manufacture or sell any article using the same or similar signs, marks, wrappers, or labels. Trademark law protects the public by making consumers confident that they can identify brands they prefer and can purchase those brands without being confused or misled. Trademark laws also protect hospitality managers by ensuring that they are getting the quality they are paying for. Patent When an inventor creates something new, he or she may apply for a patent on the invention. If, for example, a restaurateur invents a piece of kitchen LEGALESE Commercial lease: A lease that applies to business property. LEGALESE Intellectual property: Personal property that has been created through the intellectual efforts of its original owner. LEGALESE Trademark: A word, name, symbol, or combination of these that indicates the source or producer of an item. LEGALESE Patent: A grant issued by a governmental entity ensuring an inventor the right to exclusive production and sale of his or her invention for a fixed period of time.
106 Chapter 4 Legally Managing Property equipment that can easily peel and remove the center from a large Spanish onion, that restaurateur would be able to quickly produce one of today’s most popular appetizer items. It would not be fair for another restaurateur to see that piece of equipment and proceed to manufacture it for sale him- or herself if the first restaurateur had applied for, and received, a patent on that piece of equipment. The U.S. Patent and Trademark Office is the federal entity responsible for the granting of patents. An inventor, as the owner of the patent, has the right to exclude any other person from making, using, or selling the invention covered by the patent anywhere in the United States for 17 years from the date the patent is issued. If an inventor has applied for, but not yet received a patent, he or she may use the term “patent pending” or “patent applied for.” Copyright A copyright is the set of rights given to reproduce and use intellectual property. For example, the writer of a song has a right to compensation any time that song is performed. If a singer takes the song, records it, and then sells the recording, the copyright laws would require the singer to fairly compensate the songwriter who wrote the song’s music and lyrics. Copyright protection was considered so important that the founding fathers of the United States specifically granted the new Congress the responsibility of regulating copyrights. Figure 4.6 is an excerpt from the United States Constitution that addresses the issue of copyrights. The owner of a copyright has the right to prevent any other person from reproducing, distributing, performing, or displaying his or her work for a specific period of time. The Copyright Act of 1976 states that copyrighted work can be a literary work, musical work, dramatic work, pantomime, choreographic work, pictorial work, graphic work, sculptural work, motion picture, audiovisual work, sound recording, or computer program. Most of the items found on the Internet are copyrighted also, including the text of Web pages, contents of e-mail, and sound and graphic files. When an individual has been granted a copyright, he or she is said to be the copyright owner. Copyright laws exist in foreign countries as well as the United States. In some cases, it is legal to use a copyrighted work without permission from the owner, but the purpose of such utilization is very important. A copyrighted work used for commentary, news reporting, teaching, scholarship, or research, is normally not an infringement of a copyright. In the hospitality industry, it is critical that copyrighted works be used only when appropriate authorization has been received, particularly when the use of a copyrighted work—such as the broadcasting of a boxing match—will provide a direct economic benefit to the hospitality establishment. Generally speaking, Figure 4.6 Excerpt from the U.S. Constitution. LEGALESE Copyright: The legal and exclusive right to copy or reproduce intellectual property. LEGALESE Copyright owner: A person or entity that legally holds a right to intellectual property under the copyright laws.
Respecting Intellectual Property Rights 107 the courts are aggressive enforcers of copyright laws, thus it is a good idea to be very clear about the origin and ownership of potentially copyrighted works before they are used in a manner to produce income and profit. Trade Dress While the rights related to trade dress are actually a part of those rights related to trademarks, in the hospitality industry, they merit separate discussion. A trade dress is a very special and unique visual image. Trade dress includes color schemes, textures, sizes, designs, shapes, and placements of words, graphics, and decorations on a product or its packaging. In the hospitality industry, an entire restaurant may be created in such a way as to be protected under the laws related to trade dress. The laws in this area can be murky. Certainly, no one restaurant chain has an exclusive right to operate a restaurant with a “down home” theme. A trade dress question arises, however, when one restaurant chain uses the same items to create that feel as does its competitor. Italian, Mexican, French, and American restaurants, to name a few, all have unique characteristics associated, not with the product served, but with the feel and visual image of the establishment. Trade dress protection allows the creative restaurateur to protect his or her aesthetic ideas in an industry that highly rewards innovation and creativity. For an excellent and recent examination of the trade dress issue, do the following Search the Web exercise. It involves the case of two Mexican-style restaurants, one of which was accused of a trade dress violation. LEGALESE Trade dress: A distinct visual image created for and identified with a specific product. LEGALESE Public domain: Property that is owned by all citizens, not an individual. SEARCH THE WEB 4.1 Log on to the Internet and enter supct.law.cornell.edu/supct. 1. In the Search field, type: “Two Pesos.” 2. Select: “Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763 (1992).” 3. Select: Syllabus. Review the intangible property rights Supreme Court case involving Two Pesos, Inc. and Taco Cabana, Inc. Be prepared to describe in class the items of similarity between the two businesses on which the court based its decision. Preventing Intellectual Property Rights Infringement In order to prevent infringing on the rights of intellectual property owners, the United States patent and trademark office maintains a database of registered patents and trademarks. Consult that database if there is any question of whether a mark or an invention is in the public domain. If a company does not take care, its trademarks can become part of the public domain. “Aspirin” is often mentioned as a word that began as a trademarked term, but later passed into such common usage that the courts would no longer enforce the property rights of the word’s creator. A common word, used frequently by society, cannot become the subject of trademark protection. While most hospitality managers can, through thoughtful planning, avoid infringing on patent and trademark rights, copyright issues are more complex. Consider the case of the corporation that owns a theme park with a variety of thrill rides. One of the most popular is a seated ride where four passengers share a
108 Chapter 4 Legally Managing Property padded car that progressively goes faster and faster, traveling up and down on a circular track. The ride is fast, loud, and popular with teenagers. Hundreds of flashing lights and loud music, played by 25 broadcast-quality speakers, are an important ingredient in this ride. The corporation is free to put any type of lighting around the ride that it feels would be appropriate. However, the company is not free to broadcast any music it wishes over the speakers in conjunction with the ride, unless the music is used in compliance with U.S. copyright laws. Figure 4.7 shows the section of the United States legal code that deals with the infringement of copyright. Copyright laws in the United States give songwriters and publishers the right to collect royalties on their intellectual property whenever their songs are played in public. Note that the law allows the owner of the copyright to recover the profits made by any group that unlawfully uses copyrighted material. Figure 4.7 Copyright infringement.
Respecting Intellectual Property Rights 109 Whether a hospitality manager plays songs in an establishment on CDs, television, tape, or in a live performance, the owners of the song have a right to royalties. This is because federal copyright laws state that playing copyrighted music in a public place constitutes a performance. When copyrighted music is performed in public, hospitality managers are in violation of the law if they do not pay the royalties due the owners of the music that has been played. Of course, it would be extremely difficult for the practicing hospitality manager to know exactly who owns the rights to a particular piece of music. Most of the songs played in the United States are licensed by either Broadcast Music, Inc. (BMI); the American Society of Composers, Authors, and Publishers (ASCAP); or SESAC, which originally stood for the Society of European Stage Actors and Composers, but now is referred to solely by its acronym, pronounced SEE-sack. In order to play a given piece of music, a fee must be paid to the licensor that holds the right to license the music in question. Fee structures are based on a variety of factors, but the average restaurant, playing background music seven days a week, would be expected to pay only a few hundred dollars per year for the right to broadcast most of the music available for play. If the hospitality manager refuses or neglects to pay the fees rightfully due a licensing group, he or she can be subject to fines or prosecution. Congress has determined that any facility that plays its background music on a piece of equipment that could normally be found in a home will not be held to the normal copyright infringement rules if they do not charge admission to hear the music. Certainly, it is not the intent of the copyright laws to prohibit turning on a simple radio or television in a public place. In 1998, President Clinton signed the Fairness in Music Licensing Amendment, a law that allowed small restaurants an exemption from some licensing fees. The law took effect in January 1999. The specific provisions of the amendment providing for the free broadcast of music and video are quite clear. Restaurants under 3,750 square feet can play as many televisions and radios as they desire without paying royalty fees. There is no restriction on the size of the television that may be installed in a restaurant of this size. For specific information, log on to www.copyright.gov. For restaurants larger than 3,750 square feet, if the owner applies for and receives an exemption, the restaurant may play up to four televisions (no more than one per room), and use up to six speakers (no more than four per room). The television sets cannot be larger than 55 inches. Many hospitality venues utilize jukeboxes for their patrons’ entertainment. It is ordinarily the provider of the jukebox who has the burden of paying the royalties for the music included in the jukebox, but this should be spelled out in the agreement prior to the installation of the jukebox. Just as music is covered by copyright laws, so too are the broadcasts of such groups as the National Football League (NFL), Major League Baseball (MLB), the National Basketball Association (NBA), and others. The right to air these broadcasts is reserved by the group creating the programming, and the hospitality manager who violates their copyrights does so at great risk. If you have any doubt about the legality of your intended broadcasts, contact the broadcast company (i.e., cable operator) or the owner of the broadcasted product (NFL, Time Warner, etc.) to clarify the circumstances under which you may broadcast and to get written permission to do so. For hotels, the broadcasting of in-room videos or movies on demand is treated in a similar way to jukeboxes in restaurants. The providers of the service to the hotel operator are ordinarily responsible for paying the royalties from showing the product. Again, this needs to be clarified in the agreement between the provider of the service and the hotel operator.
110 Chapter 4 Legally Managing Property INTERNATIONAL SNAPSHOT U.S. Hotel Companies Seeking Trademark Protection May Now File in the U.S. for Protection Abroad Most well-known hotel companies earn their profits primarily by managing and franchising hotels, thereby allowing the hotels to operate under the hotel company’s “flags.” These flags (such as Westin, Marriott, and Hilton) are trademarks. They represent a way of doing business, the hotel company’s valuable relationships with its customers, and, in essence, the company’s power to deliver economic performance to a hotel. Hotel companies, therefore, consider their trademarks to be among their most valuable assets. Valuable assets must be protected, and trademarks are no exception. Trademarks are usually protected by registering them in the jurisdictions where they are used. These registrations must then be renewed at intervals prescribed by the laws of the applicable jurisdiction. Hotel companies often operate hotels internationally. This means that, to protect their marks, they should, at a minimum, register and renew their registrations in each country where the hotels are located. They should also consider “registering defensively” in countries where there is a high “knock-off” risk. Before November 2, 2003, the registration process required a U.S. hotel company to engage in a country-by-country registration process. One shortcut registration process has existed for some time: Companies may register for and obtain a European Community Trade Mark (ECTM), which provides protection in all countries of the European Union for the cost of a single application. But as of that date, U.S. companies were given an additional shortcut alternative to the country-by-country registration process. On November 2, the United States became the fifty-ninth country to implement the Madrid Protocol. The Madrid Protocol is a treaty that allows trademark holders to file a single application covering all 60 protocol member countries. The resulting International Registration permits some applicants to greatly reduce costs associated with multiple international trademark applications. Like any trademark protection regime, the Madrid Protocol has disadvantages as well as advantages: One-stop Madrid filings through the U.S. Trademark Office are more convenient and initially less costly than filing multiple international applications. International registrations offer the same scope of protection as a registration in the applicant’s home country. Because U.S. trademark law requires applicants to describe the goods covered by their marks more narrowly than that of other countries, an international registration based on a U.S. application will give a U.S. trademark holder narrower protection in some other countries than non-U.S. trademark owners would receive. Because an international application must be based on an original “home country” application, if a U.S. applicant’s original U.S. application is refused by the Patent and Trademark Office, or fails for any other reason within five years, the entire international application based on it will also fail. An applicant may refile applications in each individual country while retaining the original filing date, but the fees and costs associated with the original protocol application will be lost. If member country trademark offices raise substantive objections to applications for an international registration, local counsel will be necessary to resolve each such objection. Madrid filings do not cover countries that are not members of the Madrid Protocol. Some important countries that are not members include Canada and most of Central and South America.
Respecting Intellectual Property Rights 111 Whether a company should seek international registration under the Madrid Protocol depends heavily on the countries where the company needs protection. If, for example, the company expects to use its mark solely in Europe and the United States, a European Community Trade Mark will provide protection in all countries of the European Union for the cost of a single application, and the costs and benefits of prosecuting a ECTM application will be generally more favorable than those associated with a Madrid filing. If, however, the company requires broad, worldwide protection, an international application may be the best overall approach. Provided by Irvin W. Sandman, Esq., and Robert C. Cumbow, Esq., of Graham & Dunn’s Hospitality, Beverage, and Franchise Team, Seattle, Washington. www.grahamdunn.com WHAT WOULD YOU DO? Assume that you are the food and beverage (F&B) director at a full-service hotel in a large East Coast college town. Your general manager, Mr. Peterson, is planning to have a large event centered around this year’s Super Bowl. As the F&B director, you are an integral part of the event planning committee. One of the teams in the NFL final is from the state in which your hotel is located, so fan interest is very high. Mr. Peterson proposes an event that will be held in the hotel’s Grand Ballroom, which can hold 700 people. The festivities will begin at 3:00 P.M. on Super Bowl Sunday, with the televised pregame show, a darts tournament, and a Mexican food buffet. At 6:30 P.M., the game is to be shown on five 60-inch TV screens that will be placed around the ballroom. The chief maintenance engineer has assured Mr. Peterson that the sets can be mounted on the ballroom’s walls. The evening will conclude with a postgame “victory” party, which will end around midnight. During one of the planning meetings, the discussion centers on the admission price that will be charged. The issue of reserved seating is raised by Scott Haner, director of sales and marketing. He believes that corporate clients of the hotel will be more inclined to attend if they can be assured good seats near the largescreen televisions. 1. As a hospitality professional, what issues must you consider prior to finalizing this Super Bowl party event? 2. If Mr. Peterson elects to charge a $20 fee for seats close to the large screens, but only $5 for seats farther away from the screens, would your opinion be different? Why or why not? 3. What are the responsibilities of the management team in this scenario? THE HOSPITALITY INDUSTRY IN COURT To understand just how possessive movie studios can be about their copyrights and how extensive the litigation can be in this area of the law, consider two case studies. First, Prof’l Real Estate Investors, Inc. v. Columbia Pictures Indus., 508 U.S. 49 (1993). FACTUAL SUMMARY Professional Real Estate Investors, Inc. (PRE) operated a resort hotel, La Mancha Private Club and Villas (La Mancha), in California. The hotel had a substantial collection of movie titles on videodisc, and each room of the hotel was equipped with a videodisc player. The hotel made the videodiscs available for rent to guests for in-room viewing. PRE was also developing a market to sell videodisc players to other hotels for in-room viewing of rented movies. Columbia Pictures Industries, Inc. (Columbia) and several other movie studios held the copyrights to the videodisc movies PRE purchased and rented to guests. Columbia also licensed the transmission of copyrighted movies to hotels through a cable television system called Spectradyne. So PRE was in competition with Columbia for the in-room viewing market at La Mancha. PRE was also entering into competition with Columbia for the in-room viewing market of the hotel industry in general with the introduction of videodisc players for sale.
112 Chapter 4 Legally Managing Property Columbia eventually sued PRE for copyright infringement. Columbia claimed the rental of videodiscs for in-room viewing infringed its right to “perform the copyrighted work publicly” (17 U.S.C. § 106(4)). PRE in turn sued Columbia for violation of the Sherman (antitrust) Act. PRE claimed Columbia’s copyright infringement suit was a “sham,” or simply a way to hide anticompetitive behavior and a broader conspiracy to control the movie industry. If the copyright lawsuit was a sham, then Columbia could not claim immunity from antitrust liability. QUESTION FOR THE COURT The question for the court was whether Columbia’s copyright infringement suit was a sham to cover its own anticompetitive behavior. In deciding whether the suit was a sham, the court first discussed Columbia’s copyright infringement suit. PRE and Columbia both agreed PRE could sell or lease lawfully purchased videodiscs if it was the first purchaser. Both parties also agreed the playing of the videodiscs in the hotel rooms was a performance, as defined by the Copyright Act; however, the in-room viewing of videodiscs was not a public performance of the copyrighted material. So the rental of videodiscs for in-room viewing was not a violation of the Copyright Act. After discussing the copyright issue, the court decided whether Columbia’s lawsuit was a sham. PRE argued the copyright suit was a sham because Columbia did not honestly believe it could win. Columbia argued the lawsuit was a legitimate effort to stop a copyright infringement. DECISION Ultimately the court ruled in favor of Columbia. While PRE was not violating the Copyright Act, Columbia’s lawsuit was not completely baseless. The Court defined a baseless lawsuit as one no reasonable person could expect to win. So, while Columbia did not win the lawsuit, there was at least some reason to believe success was possible. Since the lawsuit was not baseless, it was not a sham meant to conceal anticompetitive behavior. MESSAGE TO MANAGEMENT Carefully choose your entertainment and amenity providers. Be sure that you are indemnified by them in your contract with them for any potential copyright infringement issues. Next consider the case of Home Box Office, Inc. v. Pay TV of Greater New York, Inc. 467 F. Supp. 525 (E.D.N.Y., 1979). FACTUAL SUMMARY In 1974, Home Box Office, Inc. (HBO) contracted with Microband National Systems, Inc. (Microband) to distribute HBO subscription television service to areas in and around New York City. HBO transmitted its service from atop the Empire State Building to various points throughout New York City. Microband received the signal with special equipment, converted the signal, and distributed it to individual households. Microband subcontracted the distribution service to other companies. Pay TV of Greater New York, Inc. (Pay TV) was one of those distribution companies. Pay TV signed an agreement with Microband in October 1975 to distribute HBO services in Queens County for as long as Microband’s contract continued with HBO. Pay TV claimed it entered the agreement believing it would eventually take the place of Microband as the main distributor. Pay TV repeatedly requested the right to distribute HBO services in other areas around New York City. HBO denied these requests despite Pay TV’s investment of money and effort in securing new service areas. In May 1976, Microband ended the agreement with HBO. HBO, and Pay TV entered into negotiations for Pay TV to have exclusive distribution rights in the King and Bronx County areas as well as the already existing rights in Queens County. By July 1976, no agreement was reached, but Pay TV continued to distribute services in Queens County and even expanded into other areas. In February
Respecting Intellectual Property Rights 113 1977, HBO demanded in writing that Pay TV stop transmitting HBO service completely. A final attempt to reach an affiliation agreement failed, and in August 1978, HBO advised Pay TV it was transmitting HBO service without authorization (“pirating”). HBO advised Pay TV the transmission was illegal, and if it did not stop, a lawsuit would be filed. HBO filed suit in December 1978. At the time of the lawsuit, Pay TV continued transmitting to over 8,000 customers, collecting $75,000 per month. No payment was made to HBO by Pay TV. HBO asked for a temporary injunction to stop Pay TV from transmitting HBO service. QUESTION FOR THE COURT The question for the court was whether Pay TV could be ordered to stop intercepting and transmitting the HBO signal. HBO argued Pay TV was violating Section 605 of the Communications Act of 1934 (the act). Under Section 605, anyone intercepting and using signals not intended for the general public was violating the act. Pay TV admitted Section 605 applied to the suit between it and HBO, but argued HBO consented to the interception of the signal. Pay TV also argued HBO waited too long to ask for an injunction. Finally, Pay TV argued HBO was suffering harm, for which money damages could compensate. With this argument, Pay TV could pay HBO damages but continue to transmit the service while the lawsuit was taking place. DECISION The court ruled Pay TV was pirating services and found no evidence that HBO consented to the illegal transmission. The court also held HBO was not too late in seeking an injunction, and money damages would not repair the harm being done by Pay TV. Pay TV was ordered to cease transmission. MESSAGE TO MANAGEMENT Pirating (or profiting from) broadcasts not meant for distribution to the general public (or without a license from the distributor, e.g., NFL) is illegal and can subject you to serious economic liability. WHAT DID YOU LEARN IN THIS CHAPTER? Property can be classified into several different categories. Real property refers to land and all the things attached to the land. Fixtures are personal items that were once separate but are now considered to be real property. Most items other than land are classified as personal property, which includes both tangible and intangible property. It is important to understand the difference among the categories of property, because different methods of financing the purchase of property exist for each category. When property is transferred from one owner to another, specific types of documents and sales contracts are used to ensure the legality of the purchase and to protect the buyer and seller. Warranties, or advertised claims about the performance or quality of a product, are often treated as part of the sales contract. Thus, a seller is obligated by law to back up any warranties made. The Uniform Commercial Code offers protection under the law to both buyers and sellers of personal property, as well as to financial lenders. A lease is a contract that transfers possession, but not ownership, of a piece of property. Leasing real and personal property is a common occurrence in the industry today. Whether a hospitality manager assumes the role of a lessor (landlord) or lessee, it is important to make sure that the lease agreement contains essential terms that will spell out the details of the agreement, and offers adequate protection to both parties. Trademarks, patents, copyrights, and concept rights are all protected under the law. Hospitality operators must make sure that they are in compliance with laws governing the serving of brand-name products; the use or creation of concepts, logos, or images; and the public broadcasting of music and video.
114 Chapter 4 Legally Managing Property RAPID REVIEW After you have studied this chapter, you should be prepared to: 1. Restate the difference between real and personal property, and give five hospitality examples of each. 2. Secure a bill-of-sale form, and check it for the six critical information items listed in this chapter. List additional items on the bill of sale, and describe why you believe each is included. 3. Prepare a memo for your staff that lets them know the difference between a deed and a bill of sale. Include an explanation of when each would be used. 4. Secure a copy of an express warranty, and analyze it for differences with an implied warranty. 5. Using the Internet, locate a lender who finances hospitality operations. Determine the current interest rate for a $1 million unsecured loan. 6. Choose a popular, independent, local restaurant. Write a two-page description of that property that you feel defines its trade dress. 7. Assume your operation is considering whether to buy or lease a beerdispensing system from your vendor. Your boss has asked you to prepare a memo addressing the legal aspects of the decision. Prepare a one-page memo that addresses the major issues. 8. Give a hospitality example of each of the following: Trademark Patent Copyright Trade dress TEAM ACTIVITY After reviewing Section 4.4 on leases, form teams of two, then pair up with another team. One team will represent the hotel; the other team will act as a potential tenant. Each team will have 15 minutes to review their position, after which 45 minutes will be used to negotiate the terms of a leasing agreement, using the following information: The space to be leased occupies 5,000 square feet in a hotel. The potential tenants are looking for a primary 10-year lease to open a restaurant/nightclub. Average rental rate in the area is $10 per square foot for a three-year lease. The space is a shell only (walls, roof, dirt floor). Make the best deal you can. Be sure to address the rental rate, finish-out allowance, lease term, and other issues raised in your reading and class discussions. If all issues are not resolved, discuss the terms of the last offer made.
Chapter 5 Regulatory and Administrative Concerns in the Hospitality Industry 5.1 FEDERAL REGULATORY AND ADMINISTRATIVE AGENCIES Internal Revenue Service (IRS) Occupational Safety and Health Administration (OSHA) Environmental Protection Agency (EPA) Food and Drug Administration (FDA) Equal Employment Opportunity Commission (EEOC) Bureau of Alcohol, Tobacco, and Firearms (ATF) Department of Labor (DOL) Department of Justice (DOJ) 5.2 STATE REGULATORY AND ADMINISTRATIVE AGENCIES Employment Security Agency Alcohol Beverage Commission (ABC) Treasury Department/Controller Attorney General Public Health Department Department of Transportation 5.3 LOCAL REGULATORY AND ADMINISTRATIVE AGENCIES Health and Sanitation Building and Zoning Courts and Garnishment Historical Preservation Fire Department Law Enforcement Tax Assessor/Collector 5.4 MANAGING CONFLICTING REGULATIONS 5.5 RESPONDING TO AN INQUIRY 5.6 MONITORING REGULATORY CHANGE
116 Chapter 5 Regulatory and Administrative Concerns in the Hospitality Industry “Trisha Sangus here, how can I help you,” said Trisha as she picked up the telephone in her kitchen. It was a Saturday, and one of her days off. Lance Dani, front office supervisor at the hotel was on the other end of the line. “Ms. Sangus, I’m really sorry to call you at home, but we have a problem at the front desk. It’s Coach Keedy from Northern University. He’s ready to check out.” Trisha liked Coach Keedy. His team competed against the local university twice a year, and Trisha considered herself fortunate to have acquired his business. Despite the fact that he brought a large number of energetic college students to her hotel each time he arrived, the students were generally well-mannered and caused no difficulty. She certainly welcomed the weekend business they brought to town. Coach Keedy’s team had lost the night before, and she knew when that happened, he would take it hard. It tended to be a bit unpleasant for everyone the next day. “What seems to be the problem?” Trisha inquired. “Well,” Lance replied excitedly, “the coach is refusing to pay his entire bill. He says that, as a nonprofit organization, his college is tax-exempt, and he won’t pay the sales tax or the local occupancy tax on his rooms. He’s very upset. I asked him for a tax-exemption certificate, but he doesn’t have any documentation proving his tax-exempt status. He said any fool would know a college is taxexempt. Those were his exact words.” I was afraid this might happen, thought Trisha. In the past, her hotel had billed Coach Keedy’s school directly for any room charges incurred when the team stayed at the hotel. However, the school recently changed its billing policy. Now, the coaches were expected to pay a team’s hotel bill out of their own pockets, then seek reimbursement from the school. While she was sure the new policy had some financial merit for the school, it was a change that Trisha felt had some distinct operational disadvantages, and this was one of them. When the hotel controller’s office billed the school directly, the complex issue of taxation was handled smoothly. The accountants for both the hotel and the school knew the intricacies of tax-exempt status. Dealing with customers across the front desk was another matter. “How does he want to pay for the charges?” asked Trisha. “With a personal check,” replied Lance. “But he asked me to find a copy of the school’s federal tax-exemption document.” Trisha knew that the college where Coach Keedy worked had submitted a federal identification number authorizing a tax exemption. The hotel controller’s office had the document on file. “Okay,” said Trisha, “we know the coach represents a tax-exempt institution, and we do have his federal ID number on file, but by law, we’re not allowed to deduct the tax if he pays with a personal check. Charge him the tax, just as the regulations require us to do. Explain that you talked to me, and I authorized it. If he wants a further explanation, call me back and I will talk to him and explain why. I also think it would be a good idea for you and me to get together tomorrow to review federal tax exemption status, state taxes, and local option taxes, such as the occupancy tax. I think I can clear up some misunderstandings you seem to have. Remember, call me back if you have more trouble. See you tomorrow.” “Okay Ms. Sangus, goodbye,” Lance replied as he slowly hung up the telephone and stepped out of his office to explain the situation to the coach. Lance had a pretty good idea that, despite his best efforts, the coach would still want to talk to his boss. He also had a good idea that tomorrow’s meeting with Ms. Sangus would be one in which note taking would be required. 1. How federal governmental agencies are involved in regulating the hospitality industry. 2. How to analyze the various roles of state governmental agencies that regulate the hospitality industry. 3. How to identify local governmental agencies involved in regulating the hospitality industry. 4. How to properly respond to an official inquiry or complaint from a regulatory entity. IN THIS CHAPTER, YOU WILL LEARN: 5.1 FEDERAL REGULATORY AND ADMINISTRATIVE AGENCIES The hospitality industry is regulated by a variety of federal, state, and local governmental entities. Hospitality managers must interact with these agencies in a variety of different ways, and observe all applicable procedures and regulations
Federal Regulatory and Administrative Agencies 117 established by government. Managers must fill out forms and paperwork, obtain operating licenses, maintain their property to specified codes and standards, provide a safe working environment, and open up their facilities for periodic inspection. The purpose of this chapter is to help you understand the scope of the regulatory process and be able to respond to questions from these regulatory agencies in a way that is both legally correct and sound from a business perspective. With thousands of federal, state, and local agencies, departments, offices, and individuals regulating business today, it is simply not possible for a hospitality manager to be knowledgeable about all the requirements that may apply to his or her operation. It is possible, however, to do the following: 1. Be aware of the major entities responsible for regulation. 2. Understand how to resolve conflicting regulations. 3. Be aware of the process for responding to an inquiry or complaint from a regulatory entity. 4. Stay abreast of changes in regulations that affect your segment of the industry. Internal Revenue Service (IRS) The Internal Revenue Service (www.irs.gov) is a division of the United States Department of Treasury. The stated mission of the IRS is to: “Provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities, and by applying the tax law with integrity and fairness to all.” While it is unlikely that the agency responsible for collecting taxes will be popular in any country, the right of the IRS to charge an individual with a criminal act makes it deserving of a manager’s thoughtful attention. In the hospitality industry, managers interact with the IRS because of the manager’s role as both a taxpayer (by paying income tax on the profits of a business) and a tax collector for the federal government (by withholding individual employee taxes on income). The IRS requires businesses to: File quarterly income tax returns and make payments on the profits earned from business operations (Form 941). Taxes must be filed on or before the last day of the month following the end of each calendar quarter. File an Income and Tax Statement with the Social Security Administration on or before the last day of February (Form W-3). Withhold income taxes from the wages of all employees (as specified in Circular E). Withheld employee taxes are deposited with the IRS at regular intervals (Form 8109). Employee withholding taxes must be paid quarterly, if the total amount of withheld tax for the period is less than $500; once a month, if the total amount of withheld tax is between $500 and $3,000; or within three working days of a payroll issuance, if the withheld amount is greater than $3,000. Report all employee income earned as tips (Form 8027), and withhold taxes on the tipped income. Record the value of meals charged to employees when the meals are considered a portion of an employee’s income. Record all payments to independent contractors, and file any forms listing those payments (Forms 1096 and 1099). Furnish a record of withheld taxes to all employees on or before January 31 (Form W-2), and maintain copies of this record for four years. The IRS ensures that businesses pay their taxes through periodic examinations of their financial accounts and tax records. These examinations are called audits. A hospitality manager must respond if the IRS notifies him or her of a forthcoming audit. The manager should also consult a certified public accountant
118 Chapter 5 Regulatory and Administrative Concerns in the Hospitality Industry (CPA) or attorney that specializes in tax audits as soon as possible to ensure that the appropriate documents are prepared and in order. It would be an oversimplification to state that federal tax laws are complex; they are hugely complex. As a hospitality manager, you may be responsible for submitting or filing the taxes owed by a business, so it is important that you understand the role that you play in ensuring your company’s compliance with federal tax laws. For example, the IRS considers tips and gratuities given to employees by guests or the business as taxable income. As such, this income must be reported to the IRS, and taxes, if due, must be paid on that income. In addition, employers are responsible for assisting the IRS in this reporting process by collecting tipreporting forms from employees and forwarding the information to the IRS. Figure 5.1 is a copy of IRS Publication 531. This publication explains the regulations related to an employee’s reporting of tipped income. It is a good example of the instructions the IRS gives an individual taxpayer. Note that the IRS explains what is required and how the requirements can be met. Just as employees have specific responsibilities for reporting tipped income, the employer also has responsibilities imposed by the IRS. For a complete list of a business’s tax responsibilities, and to obtain copies of various tax forms, visit Figure 5.1 Reporting tip income.
Federal Regulatory and Administrative Agencies 119 SEARCH THE WEB 5.1 Log on to the Internet and enter www.treas.gov. 1. Select: Business Services. 2. Select: Small Business Program. 3. Select: IRS Small Business Corner. 4. Select: Employment Taxes. 5. Select: Critical Forms and Publications. 6. Select: Publication 15: Circular E, Employers Tax Guide. Read the portion of Publication 15 that refers to an employer’s responsibilities related to the reporting of tip income by employers. Occupational Safety and Health Administration (OSHA) OSHA (www.osha.gov) is an agency of the Department of Labor. It was created in 1970 after the passage of the Occupation Safety and Health Act. The purpose of the act was “to assure, so far as possible, every working man and woman in the nation safe and healthful working conditions.” Despite criticism from many in business, OSHA has taken an aggressive role in protecting workers’ rights. All businesses, including hospitality operations, must comply with the extensive safety practices, equipment specifications, and employee communication procedures mandated by OSHA. Specifically, businesses are required to: Provide a safe workplace for employees by maintaining facilities and providing protective clothing, in accordance with OSHA safety and health standards (these standards will vary for different types of workplace environments). Purchase equipment that meets OSHA specifications of health and safety. Establish safety checklists and training programs for employees, especially for those who will operate equipment that may cause injury. Report to OSHA within 48 hours any workplace accidents that result in a fatality or require the hospitalization of five or more employees. Maintain a record of work-related injuries or illnesses (OSHA Log 200), and file that record once a year. Employers are also required to post an annual summary of the prior year’s injuries and illnesses. Schedule at least one employee trained in first aid on each work shift. Display OSHA notices on employee rights and safety in appropriate languages, in places where the notices can be easily read. Provide all employees with access to information on any toxic or harmful substances used in the workplace, and keep records certifying that employees have reviewed the information. Offer hepatitis B vaccinations for employees who may have come into contact with blood or body fluids. OSHA monitors workplace safety with a large staff of inspectors called compliance officers. Compliance officers visit workplaces during regular business hours and perform unannounced inspections to ensure that employers are operating in compliance with all OSHA health and safety regulations. In addition, compliance officers are required to investigate any complaints of unsafe business practices. Figure 5.2 is an excerpt of the Occupational Health and Safety Act that gives the agency authority to enter a business to investigate worker safety. the IRS Web site at www.irs.ustreas.gov and look up employment taxes in the Small Business Corner. The next Search the Web exercise will guide you as you examine these requirements.
120 Chapter 5 Regulatory and Administrative Concerns in the Hospitality Industry Figure 5.2 OSHA inspection provisions. Figure 5.3 OSHA penalties for noncompliance.
Federal Regulatory and Administrative Agencies 121 Figure 5.3 (Continued) Hospitality managers have the right to accompany OSHA compliance officers during an inspection, and managers should make it a point of doing so, for two reasons. First, the manager may be able to answer questions or clarify procedures for the compliance officer; second, the manager should know what transpired during the inspection. Afterward, the manager should discuss the results of the inspection with the compliance officer and request a copy of any inspection reports filed. Generally, inspections are not announced, although the compliance officer must state a specific reason for the inspection. The penalties for violating OSHA regulations can be severe and costly. Figure 5.3 details the penalties OSHA can assess against a business. Because of the stringent penalties for noncompliance, it is important that hospitality managers ensure their workplace is safe. As stressed in this book several times, the best way to avoid accidents, lawsuits, and penalties is to adopt a philosophy of preventative management. Where worker safety is concerned, this may be as simple as providing information or as complex as developing an employee training program. One example of the type of information OSHA requires to be posted or provided is the Material Safety Data Sheet (MSDS). An MSDS is a manufacturer’s statement detailing the potential hazards and proper methods of using a chemical or toxic substance. The MSDS is intended to inform workers about the hazards of the materials they work with so that they can protect themselves and respond to emergency situations. The law states that employees must have access to MSDSs and be assisted in reading and understanding them. OSHA inspectors are responsible for ensuring that MSDSs are placed in areas accessible to workers.
122 Chapter 5 Regulatory and Administrative Concerns in the Hospitality Industry Currently, according to OSHA’s Hazard Communication standard, MSDSs must include: The material’s identity, including its chemical and common names. Hazardous ingredients (even in parts as small as 1 percent). Cancer-causing ingredients (even in parts as small as 0.1 percent). List of physical and chemical hazards (stability, reactivity) and characteristics (flammable, explosive, corrosive, etc.). List of health hazards, including: Acute effects, such as burns or unconsciousness, which occur immediately. Chronic effects, such as allergic sensitization, skin problems, or respiratory disease, which build up over a period of time. If the material is a known carcinogen. Limits to which a worker can be exposed, specific target organs likely to sustain damage, and medical problems that can be aggravated by exposure. Precautions and safety equipment and emergency and first aid procedures. Specific fire-fighting information. Precautions for safe handling and use, including personal hygiene. Identity of the organization responsible for creating the MSDS, date of issue, and emergency phone number. Figure 5.4 is an excerpt example of an MSDS. The specific product detailed is Jet-Dry, a trademarked item distributed by Economics Laboratories for use in commercial dishwashers. The point here is that all hospitality managers must be aware of the sometimes very specific requirements placed upon them by federal agencies. The requirements can be numerous, and they change frequently. One way to stay current with your obligations as an operator is to log on to OSHA’s Web site (www.osha.gov) and click on New. Environmental Protection Agency (EPA) The EPA (www.epa.gov) is an independent agency of the federal government. Established in 1970, the EPA’s mission is to “permit coordinated and effective government action on behalf of the environment.” In the hospitality industry, ANALYZE THE SITUATION 5.2 Carlos Magana was a Spanish-speaking custodian working in a health-care facility kitchen. Bert LaColle was the new food and beverage director. Mr. LaColle instructed Mr. Magana to clean the grout between the red quarry kitchen tile with a powerful cleaner that Mr. LaColle had purchased from a chemical cleaning supply vendor. Mr. LaColle, who did not speak Spanish, demonstrated to Mr. Magana how he should pour the chemical directly from the bottle to the grout, then brush the grout with a wire brush until it was white. Because the cleaner was so strong, and because Mr. Magana did not wear protective goves, his hands were seriously irritated by the chemicals in the cleaner. In an effort to lessen the irritation to his hands, Mr. Magana decided to dilute the chemical. He added water to the bottle of cleaner, not realizing that the addition of water would cause toxic fumes. Mr. Magana inhaled the fumes while he continued cleaning, and later suffered serious lung damage as a result. Mr. LaColle was subsequently contacted by OSHA, which cited and fined the facility for an MSDS violation. Mr. LaColle maintained that MSDS statements, including the one for the cleaner in question, were in fact available for inspection by employees. 1. Did the facility fulfill its obligation to provide a safe working environment for Mr. Magana? 2. What should Mr. LaColle have done to avoid an OSHA violation?
Federal Regulatory and Administrative Agencies 123 Figure 5.4 An MSDS for Jet-Dry.
124 Chapter 5 Regulatory and Administrative Concerns in the Hospitality Industry the EPA serves as a regulator of pesticides, as well as water and air pollution. Care must be taken when discharging waste, particularly toxic waste such as pesticides or cleaning chemicals from laundry areas. In 1996, new amendments were added to the Safe Drinking Water Act of 1974, which is a federal law that empowers the EPA to set standards for drinking water quality and to oversee the states, towns, and water suppliers that implement and enforce those standards. The EPA also monitors indoor air-quality issues (such as smoking in commercial buildings). Recently, the EPA and the National Restaurant Association began working together to develop integrated waste management processes that could be adapted by local governments and by different types of foodservice operations. Many EPA directives are carried out or implemented by state and local governments, such as state recycling laws and municipal ordinances for trash disposal. Thus, while you, as a hospitality manager, may have little contact with the federal agency, it is important to be fully aware of your state and local laws in these areas. Food and Drug Administration (FDA) The FDA (www.fda.gov) plays an important role in the hospitality industry. It is responsible for ensuring the proper labeling of food and the safety of food. As a foodservice manager, you will encounter the work of the FDA whenever you purchase food that has a mandatory FDA nutrition label. In addition, the FDA’s Model Food Service Sanitation Ordinance is used by many state and community health departments as a basis for their own foodservice inspection programs. Foodservice operators also need to be aware of the FDA’s precise definitions governing the use of nutritional and health-related terms. A restaurant that prints phrases such as “low-calorie,” “light,” or “cholesterol-free” in their menus must make sure that the recipes for those dishes meet the FDA’s requirements for those statements. These and other menu-labeling requirements will be discussed more fully in Chapter 12, “Your Responsibilities When Serving Food and Beverages.” Equal Employment Opportunity Commission (EEOC) The Equal Employment Opportunity Commission (www.eeoc.gov) was established by Title VII of the Civil Rights Act of 1964, and began operating on July 2, 1965. Essentially, this agency enforces laws against discrimination in employment. Figure 5.5 lists the specific laws that are enforced by the EEOC. The following general areas fall under the jurisdiction of the EEOC: Sexual harassment Race/color discrimination Age discrimination National origin discrimination Figure 5.5 Laws enforced by the Equal Employment Opportunity Commission.
Federal Regulatory and Administrative Agencies 125 Pregnancy discrimination Religious discrimination Portions of the Americans with Disabilities Act Some of these areas will be discussed in detail in Chapter 8, “Legally Managing Employees.” The impact of the EEOC upon the daily tasks of the hospitality manager is obvious. Consider, for example, the hotel manager who seeks to schedule a Christian to work on Christmas Day. The hotel is, of course, open. The question that may arise is whether the needs of the manager, who must staff the hotel, should take precedence over those of the worker, who desires a day off on the basis of his or her religious convictions. Title VII of the Civil Rights Act of 1964 prohibits employers from discriminating against individuals because of their religious beliefs when hiring and firing. The act also requires employers to reasonably accommodate the religious practices of an employee or prospective employee, unless doing so would create an undue hardship upon the employer. Flexible scheduling, voluntary substitutions or swaps, job reassignments, and lateral transfers are examples of accommodating an employee’s religious beliefs. The question of whether or not a manager could “reasonably” accommodate the request of a Christian worker to be off on Christmas Day is complex. The point to be remembered, however, is that managers are not free to act in any manner they desire. The federal government, through the requirements of the EEOC, also plays a role in the actions of management. The EEOC investigates complaints by employees who think they have been discriminated against. Businesses that are found to have discriminated can be ordered to compensate the employee(s) for damages, such as lost wages, attorney fees, and punitive damages. Bureau of Alcohol, Tobacco, and Firearms (ATF) The Bureau of Alcohol, Tobacco, and Firearms (www.atf.treas.gov) is responsible for enforcing all federal laws and regulations governing the manufacture and sale of alcohol, tobacco, firearms, and explosives, as well as for investigating incidents of arson. The ATF is housed within the U.S. Department of Treasury, just as the IRS is, because it enforces the payment of federal taxes on the production of alcohol and the sale of alcoholic beverages. Hospitality managers will interact with the ATF in the following ways: Retail sellers of alcohol, including bars, restaurants, and hotels, must pay a special federal liquor tax each year (IRS Form 11, Special Tax Return). They will receive a Special Tax Stamp showing proof the tax was paid, and must keep this stamp on the premises, available for inspection. Alcohol vendors are not permitted to mix cocktails in advance of a sale and may not reuse emptied liquor bottles to store mixed cocktails. Operators must keep records, invoices, and receipts of all alcohol purchased. Operators must properly dispose of empty liquor bottles and may not reuse or sell them. In its publication “P-5170.2, Federal Liquor Laws and Regulations for Retail Dealers,” published in 1995, the ATF specifically dictates the way liquor retailers should handle empty liquor bottles. An excerpt from P-5170.2 is presented in Figure 5.6. Note the severe penalties assessed against businesses that do not comply with this regulation. The ATF enforces these regulations with its own officers, who conduct inspections during an operation’s regular hours of business. Additional information on the regulations covering the sale of alcohol is included in Chapter 12, “Your Responsibilities When Serving Food and Beverages.”
126 Chapter 5 Regulatory and Administrative Concerns in the Hospitality Industry Department of Labor (DOL) The U.S. Department of Labor (www.dol.gov) was established in 1913 to “foster, promote, and develop the welfare of the wage earners of the United States, to improve their working conditions, and to advance their opportunities for profitable employment.” Today, the department is charged with preparing the American workforce for new and better jobs, and for ensuring the adequacy of America’s workplaces. It is responsible for the administration and enforcement of more than 180 federal laws, which govern the protection of workers’ wages, health and safety, employment, and pension rights; equal employment opportunity; job training; unemployment insurance and workers’ compensation programs; collective bargaining; and collecting, analyzing, and publishing labor and economic statistics. Following is a brief description of some of the principal federal labor-related regulations most commonly applicable to hospitality businesses. Wage and Hours The Fair Labor Standards Act (FLSA) prescribes standards for wages and overtime pay, which affect most private and public employment. The act is administered by the Wage and Hour Division of the Employment Standards Administration. It requires employers to pay covered employees the federal minimum wage and overtime of one-and-one-half-times the regular wage. It restricts the hours that children under 16 can work and forbids their employment in certain jobs deemed too dangerous. This agency also establishes guidelines for tip credits, meal credits, and uniform purchases. In Chapter 8, “Legally Managing Employees,” we will look at specific provisions of the FLSA that hospitality managers must keep in mind. Pensions and Welfare Benefits The Employee Retirement Income Security Act (ERISA) regulates employers who offer pension or welfare benefit plans for their employees. This area of the Labor Department is also responsible for reporting Figure 5.6 Refilling, reusing, and disposing of liquor bottles.
Federal Regulatory and Administrative Agencies 127 requirements for the continuation of health-care provisions, required under the Comprehensive Omnibus Budget Reconciliation Act of 1985 (COBRA). Plant Closings and Layoffs These types of occurrences may be subject to the Worker Adjustment and Retraining Notifications Act (WARN). WARN protects employees by requiring early warning of impending layoffs or plant closings. WARN is administered by a special division of the Department of Labor. Employee Polygraph Protection Act This law, enacted in 1988, bars most employers under most circumstances from using lie detectors on employees or prospective employees. The law does permit employers to request that an employee undertake such a test in connection with any ongoing investigation into an incident that resulted in loss to the employer. Results of the lie detector test are not to be shared with anyone except the examiner, the employer, or those so ordered by the courts. Family and Medical Leave Act This law, the FMLA, requires employers with 50 or more employees to grant up to 12 weeks of unpaid, job-related leave to eligible employees for the birth or adoption of a child, or for the serious illness of the employee or a family member. These provisions and others that relate to hiring and managing employees are discussed in Chapter 7, “Legally Selecting Employees,” and Chapter 8, “Legally Managing Employees.” It is important to note that other federal agencies besides the Department of Labor also enforce laws and regulations that affect employers. As discussed earlier in this chapter, laws that ensure nondiscrimination in employment are generally enforced by the Equal Employment Opportunity Commission. The TaftHartley Act, which regulates a wide range of unionization issues, is enforced by the National Labor Relations Board. Department of Justice (DOJ) In the United States, the Department of Justice (www.usdoj.gov) is headed by the U.S. attorney general. Although the position of attorney general has existed since the founding of the republic, it was not until 1870 that a separate Department of Justice was created, bringing together under the authority of the attorney general the activities of United States attorneys, United States marshals, and others. The Justice Department investigates and prosecutes federal crimes, represents the United States of America in court, manages the federal prisons, and enforces the nation’s immigration laws. It is in the area of immigration that most hospitality managers interact with the Department of Justice. The Immigration and Naturalization Service (INS) was created in 1891 and is headed by a commissioner who reports to the attorney general. The INS requires hospitality managers to secure identification documents from all those they hire. This is mandated so that jobs will be given only to those legally able to secure them. The precise method of verifying employment eligibility will be discussed in Chapter 7, “Legally Selecting Employees.” Penalties for noncompliance in this area can be severe, so it is a good idea to stay well versed in INS regulations. The Department of Justice also enforces Title III of the Americans with Disabilities Act (ADA), which states that hospitality operations must remove barriers that can restrict access or the full enjoyment of amenities by people with disabilities. The requirements for complying with this section of the ADA are discussed in Chapter 10, “Your Responsibilities as a Hospitality Operator to Guests.” In response to the unfortunate incidents occurring on September 11, 2001, the federal government made sweeping changes to many agencies, combining a number of them under the Department of Homeland Security umbrella. This
128 Chapter 5 Regulatory and Administrative Concerns in the Hospitality Industry agency is discussed more thoroughly in Chapter 13, “Legal Responsibilities in Travel and Tourism.” 5.2 STATE REGULATORY AND ADMINISTRATIVE AGENCIES Just as the federal government plays a regulatory role in the hospitality industry, so too do the various state agencies. It is important to understand that the states serve both complementary and distinct regulatory roles. The roles are complementary in that they support and amplify efforts undertaken at the federal level, but they are distinct in that they regulate some areas in which they have sole responsibility. Let’s take a brief look at some of the state entities that play a significant regulatory role in the hospitality industry. The administrative structure or specific entity name may vary by state, but the regulatory process will be similar. It is important to note that state and/or local regulations may affect the actions of hospitality managers more often than federal regulations. Codes and ordinances established at the state or local level can often be very strict, and may require investment in equipment or to pay extra diligence in the operation of a facility. The penalties for violating these laws can be just as severe as those at the federal level. Employment Security Agency Each state regulates employment and employee/employer relationships within its borders. Generally, items such as worker-related unemployment benefits, worker safety issues, and injury compensation will fall to the state entity charged with regulating the workplace. In addition, in most states, this entity will also be responsible for areas such as employment assistance for both employees and employers. Consider the case of Virgil Bollinger. The hotel where Virgil works is purchased by a new owner, who states that Virgil’s sales manager position is no longer needed. In Virgil’s state, an employer’s account is not charged for the unemployment benefits if an employee is let go as a result of staff reductions. However, Virgil believes that his employment has been terminated for other reasons, none of which relate to his work performance. It would be the role of the Employment Security Agency to determine to which, if any, unemployment compensation benefits Virgil is entitled. Workers’ compensation is an area of great concern to most hospitality managers. Worker injuries are expensive, in terms of both money and disruption to the workplace. As a hospitality manager, it is important for you to know and follow the state regulations related to workplace safety, and the method for properly documenting and reporting any work-related injury. In each state, worker safety will usually be monitored by a workers’ compensation agency, commission, or subdivision of the employment security agency. Alcohol Beverage Commission (ABC) While the sale of alcohol is not a requirement for a foodservice or lodging operation, many facilities do offer them for their guests’ enjoyment. The nature of alcohol and its consumption, however, subjects the hospitality manager to intense regulation. Generally, this regulation takes place at both the state and local levels. A state’s Alcohol Beverage Commission (ABC), will be responsible for the following areas of control: License issuing Permitted hours of sales LEGALESE Unemployment benefits: A benefit paid to an employee who involuntarily loses his or her employment without just cause. LEGALESE Workers’ compensation: A benefit paid to an employee who suffers a work-related injury or illness.
State Regulatory and Administrative Agencies 129 Advertising and promotion policies Methods of operation Reporting of sales for tax purposes Revocation of licenses As a hospitality manager, failure to abide by the regulations required to sell alcoholic beverages lawfully may subject you to criminal prosecution, as well as a civil proceeding (an administrative hearing) before the regulatory body of your state’s ABC. In addition, the enactment of Dram Shop Act legislation could make a hospitality manager, or the business itself, liable to guests or third parties and their families should significant violations of the alcohol service regulations result in injury to an intoxicated guest, or to persons harmed by an individual who was illegally served. Simply put, providers of alcoholic beverages can be held responsible for the acts of their intoxicated patrons if those patrons were illegally served. Specific techniques related to the proper selling of alcoholic beverages will be fully discussed in Chapter 12, “Your Responsibilities When Serving Food and Beverages.” States are very careful when granting licenses to sell liquor, and they are generally very aggressive in revoking the licenses of operations that fail to adhere to the state’s required procedures for selling alcohol. In most states, license revocation can be the result of: Frequent incidents of fighting, disorderly conduct, or generally creating a public nuisance. Allowing prostitution or solicitation on the premises. Drug and narcotic sales or use. Illegal adult entertainment, such as outlawed forms of nude dancing. Failure to maintain required records. Sale of alcohol to minors. Hospitality operators are also responsible for reporting all sales of alcohol to the state Alcohol Beverage Commission. The ABC will perform random audits to determine the accuracy of the information received. Other enforcement tools used by the ABC are to conduct unannounced inspections of the premises where alcohol is sold and/or to intentionally send minors into an establishment to test whether the operator will serve them. ANALYZE THE SITUATION 5.2 Trixie Mitchell managed The Dusty Cellar, a bar near a college campus. She was active in her business community and served on the college’s Presidential Advisory Board for Responsible Drinking. All servers and bartenders in her facility were required to undergo a mandatory fourhour alcohol service training program before they began their employment and to take a required refresher course each year. Each server was certified in responsible alcohol service by the national office of Ms. Mitchell’s hospitality trade association. On a busy Friday night during the fall football season, one of Ms. Mitchell’s servers approached a table with four female patrons. Since all appeared to be near 21 years old, but well under the 35-year-old limit Ms. Mitchell had established for a mandatory identification (ID) check, the server asked to see a picture ID from each guest. The server checked each guest’s ID—verifying the age, hair color, general likeness, and absence of alterations to the ID card—and then requested—in a practice unique to Dusty’s—the mandatory recitation by each patron of the birthday and address printed on the ID. Since all four guests passed their ID checks, the server served the patrons. Each guest had three glasses of wine over a period of 90 minutes. The next day, Ms. Mitchell was contacted by the state ABC and an attorney for the parents of a teenager whose car was involved in an accident with one of the four patrons served the prior night. It had been established that one of the patrons, whose ID had been professionally altered, was 20 years old, not 21. This patron was involved in the auto accident as she LEGALESE Dram Shop Acts: Legislation, passed in a variety of forms and in many states, that imposes liability for the acts of others on those who serve alcohol negligently, recklessly, or illegally.
130 Chapter 5 Regulatory and Administrative Concerns in the Hospitality Industry Treasury Department/Controller A state’s treasury department is responsible for the collection of taxes levied by that state. For those in the hospitality industry, this can include liquor taxes, sales taxes, occupancy taxes, as well as a wide array of use taxes. An excellent example of the diversity displayed by the various states in regard to taxation is the document in Figure 5.7, published in 1997 by the Iowa State University purchasing department for its employees. It demonstrates the importance of a thorough understanding of the laws regarding taxation in the state where you will manage a hospitality facility. A relatively recent development in the United States has caused an expansion of duties for many state treasury departments. In addition to the collection of taxes, these departments or agencies are often responsible for the regulation of their state’s lottery and gaming operations. As this segment of the hospitality industry expands, so too will the regulatory efforts of the various state treasury departments. Typical areas of gaming and lottery regulation by treasury departments include licensing, lottery ticket sales, winnings disbursement, and casino operations. Figure 5.8 is an excellent example of the procedures that treasury regulators can mandate in the operation of gaming facilities. In this document, left the bar and drove back to her dorm room. The ABC began an investigation into the sale of alcohol to minors, while the attorney scheduled an appointment with Ms. Mitchell’s attorney to discuss a settlement based on the potential liability arising from the Dram Shop Act legislation enacted in Ms. Mitchell’s state. 1. Did Ms. Mitchell break the law by serving alcohol to an underage student? 2. Are Ms. Mitchell and her business liable for the acts of the underage drinking if her state has enacted Dram Shop legislation? Figure 5.7 Tax-exempt notice.
State Regulatory and Administrative Agencies 131 the Michigan Treasury Department identifies some of the written procedures for money handling that must be filed with the department prior to the granting of a casino license. Attorney General The state’s attorney general is the chief legal officer of the state. Recall from Chapter 3, “Hospitality Operating Structures,” that one responsibility of the attorney general’s office is to specify the franchise information required for disclosure in that state. If, for example, an entrepreneur were interested in purchasing a franchise, the attorney general’s office would regulate the franchisor and franchisee relationship. Figure 5.8 Lottery control.